2000 annual report

CENTREFUND centrefund realty corporation is a growth- oriented, publicly traded real estate investment company that concentrates on the ownership of neighbourhood and community food-anchored shopping centres in high-growth areas. The Company’s primary investment objective is the creation of value through long-term maximization of cash flow and capital appreciation from its growing shopping centre portfolio. This objective is achieved by proactively managing Centrefund’s existing shopping centre portfolio, by seeking appropriate, opportunistic acquisitions and by undertaking selective develop- ment activities. Centrefund is managed by experienced real estate professionals who have a significant interest in creating long- term value for all shareholders. The Company’s common shares and convertible debentures trade on The Toronto Stock Exchange.

financial highlights 1 | report to shareholders 2 | operational review 5 shopping centre portfolio 10 | management’s discussion and analysis 12 management’s responsibility 22 | auditors’ report 23 consolidated financial statements 24 corporate information 43 | shareholder information 44 financial highlights

(in thousands of dollars, except per share amounts) 2000 1999 1998 1997 1996

income statement Gross rental income $ 147,893 $ 136,827 $ 112,599 $ 71,798 $ 47,477 Earnings (loss) $ (15,171) $ 11,233 $ 16,662 $ 10,020 $ 8,045 Per common share $ (1.93) $ (0.17) $ 0.45 $ 0.47 $ 0.63 Funds from operations before provision for previous management’s incentive and other fees and termination of advisory services $ 43,260 $ 44,923 $ 36,589 $ 21,311 $ 14,291 Per common share $ 2.85 $ 3.10 $ 2.63 $ 1.59 $ 1.14 Per fully diluted common share $ 1.48 $ 1.57 $ 1.46 $ 1.22 $ 1.08 Funds from operations $ (6,865) $ 18,073 $ 36,589 $ 21,311 $ 14,291 Per common share $ (0.45) $ 1.25 $ 2.63 $ 1.59 $ 1.14 Per fully diluted common share $ (0.45) $ 0.77 $ 1.46 $ 1.22 $ 1.08 Dividends declared per common share $ 0.93 $ 0.89 $ 0.85 $ 0.81 $ 0.77

balance sheet To t al a s s e t s $ 1,137,516 $ 1,085,043 $ 1,008,847 $ 638,735 $ 433,677 Total liabilities $ 740,839 $ 663,505 $ 575,806 $ 422,463 $ 275,040 Shareholders’ equity $ 396,677 $ 421,538 $ 433,041 $ 216,272 $ 158,637

common shares Weighted average number outstanding 15,200,291 14,469,728 13,947,169 13,387,996 12,502,759 Outstanding at December 31 15,376,986 15,070,323 14,307,706 13,455,501 13,353,036

Funds from Operations* To t a l A s s e t s Gross Leasable Area (in millions of dollars) (in millions of dollars) (in millions of square feet)

50 1,500 15 $44.9 $43.3

40 $1,138 12 $36.6 1,200 $1,085 $1,009 10.2 10.0 9.4 30 900 9 7.5 $21.3 $639 20 600 6 5.0 $434 $14.3

10 300 3

0 0 0 9697 98 99 00 9697 98 99 00 9697 98 99 00

* before provision for previous management’s incentive and other fees in 2000 and termination of advisory services in 1999

1 report to shareholders

The year 2000 was one of significant our properties and have begun the combined operation would result in a transition and considerable change. In process of repositioning the portfolio, greater realization of value from these August, the Gazit Group (“Gazit”) where needed. Our management team properties. acquired a controlling interest in values the importance of building on We are confident in our ability to face Centrefund. As a result, a new, experi- a strong foundation. We have high-qual- the challenges that lie ahead. We aim to enced management team is now in ity, well-located assets, with good ten- bring more focus to a geographically place at the Company. In conjunction ants. We have met with many of our widespread business. Our intent is to with the change, the incentive payments anchor and national tenants in an effort focus on active asset management to former management were accelerat- to improve relationships and raise while striving to increase our market ed and all of former management’s Centrefund’s profile. concentration. We are determined to incentive contracts were terminated. We believe that the Company’s settle the fair value incentive dispute Paying these amounts to companies expertise, and therefore its focus, with previous management, which is related to previous management to end should be concentrated on food- about to be arbitrated, on fair terms. We the fair value incentive agreement, while anchored shopping centres in high- are also committed to rebuilding share- painful in the short term, will better growth areas. holder and investment marketplace position the Company in the long term. In fiscal 2000, we entered into a confidence. Further, our management New management is operating the package of agreements with Equity team remains dedicated to creating Company for the benefit of long-term One, Inc., a New York Stock Exchange- value for the long term and ensuring a shareholders. Our Chairman and I have listed REIT, in which Gazit is the largest strong and vibrant future. a substantial interest in Centrefund shareholder, to provide us with asset through Gazit and, as a result, I can say and property management services Financial Results with confidence that we are solidly in the United States. As previously Funds from operations for the year focused on the long-term success of the announced, we have also entered into ended December 31, 2000, before provi- Company. Our commitment to building discussions with Equity One to explore sion for previous management’s incen- strong local management and broaden- the possibility of a business combina- tive and other fees, was $43.3 million or ing relationships with tenants reflects tion between our wholly owned sub- $2.85 per common share, compared to this long-term focus. Our decision- sidiary, Centrefund Realty (U.S.) $44.9 million or $3.10 per common share making process regarding properties, Corporation (“CFUS”), and Equity One. before a provision for the termination of locations and tenants is heavily influ- While negotiations are in progress, no advisory services for the same period in enced by this orientation. Our renewed definitive agreement has been reached. 1999. On a fully diluted basis, funds emphasis on asset management aims to We believe that Centrefund’s United from operations, before the aforemen- ensure that our assets perform well over States portfolio requires an experienced tioned provisions, was $1.48 per share the longer term. local management team in order to for fiscal 2000, as compared to $1.57 per During the past several months, we grow and create value. Equity One share for 1999. have been actively evaluating our would be able to provide the appropriate In fiscal 2000, net earnings and funds assets, overseeing the management of focus and fulfill these objectives. Any from operations were reduced by

2 report to shareholders previous management’s incentive and $15.2 million, or a loss per share of $1.93, than offset by increased interest costs other fees totalling $50.1 million. In 1999, compared to net earnings of $11.2 mil- as a result of borrowings incurred to net earnings and funds from operations lion or a loss per share of $0.17 for the fund development, prior year’s property were reduced by a provision for the year ended December 31, 1999. acquisitions and payments made in 1999 termination of advisory services in the We believe that the provisions for pre- and in 2000 for the termination of amount of $26.9 million. Accordingly, vious management’s incentive and other advisory services and previous manage- funds from operations in 2000, after pre- fees, and the termination of advisory ment’s incentives and other fees. vious management’s incentive and other services resulting from the internaliza- In calculating earnings per share, fees, represented an outflow of $6.9 mil- tion of the Company’s prior management, reported earnings have been reduced by lion, or $(0.45) per share, basic and fully should be considered separately, as non- $14.2 million in 2000, as compared to diluted. This compares to funds from recurring charges, when evaluating the $13.7 million in 1999, to reflect interest operations in 1999, after the provision for Company’s financial performance. and accretion on the equity component termination of advisory services, of $18.1 Rental income increased by 6.5% of the Company’s outstanding convert- million or $1.25 per share basic and $0.77 to $92.9 million in 2000 over the prior ible debentures. fully diluted. Net loss for fiscal 2000 was year comparative period. This was more

report to shareholders 3 Portfolio Positioning ment programs are currently underway the various Advisory Agreements and We strongly believe that active manage- at Northgate Mall in Edmonton, Stanley former management’s incentive plans ment of our existing portfolio, coupled Park Mall in Kitchener and Oakbrook will return to shareholders all of the with focused and disciplined acquisi- Square in North Palm Beach. future increases in value of the tion, development and redevelopment Company’s properties. activity, will allow us to grow our cash Centrefund Development Group We believe that the Company will flow and earnings per share. During fis- Centrefund Development Group (“CDG”) benefit from increased focus on proper- cal 2000, no properties were purchased. had a mixed year in 2000. On the positive ties in high-growth areas on a going-for- We view this as a short-term pause in side, centres in Pickering, Ontario ward basis. Opportunities, such as our Centrefund’s growth strategy. Sub- (Sobeys–Price Chopper), Peterborough, recent Brampton acquisition, continue sequent to year end, we purchased a Ontario (Sobeys–IGA), Longueuil, Quebec to be available for those with the 291,000 square-foot centre in Brampton. (Bank of Nova Scotia and Blockbuster) patience to find them. We will continue to look at ways to enhance the existing properties by repositioning them, where appropriate. We intend to build, for the benefit of all shareholders, on the portfolio that exists today. While the capital markets continue to The centre is anchored by Wal-Mart and and Port St. Lucie, Florida (Albertsons) represent a challenge for us, we believe Fortino’s, both tenants with long-term were completed. Commercial Retail Unit that the value inherent in the Company’s leases in place. We will continue to seek (“CRU”) development on our Lethbridge, assets, particularly with new manage- out investment and development oppor- Alberta (Safeway) and London, Ontario ment in place, will be recognized by the tunities for well-located, grocery store- (Sobeys–Price Chopper) properties financial community over the long term. anchored centres. continued to be a challenge. Upon secur- I thank the Company’s Board of As part of our strategy of enhancing ing CRU tenants, these properties will be Directors, management team and property value and realizing on that completed. employees for their hard work. I am also value when we believe the Company’s In 2001, construction will continue grateful for the efforts of all our pro- capital can be better redeployed else- in Lachenaie, Palm Beach Gardens, perty managers’ employees, who have where, we sold two properties in 2000. Florida and Plano, Texas. worked hard to improve our properties Orleans Place, a 30,000 square-foot A decision has been made to wind up in a year of great transition. As a symbol strip plaza in Gloucester, Ontario was the CDG partnership in an orderly fash- of the changes taking place, the sold to the company that owned the ion. No new properties will be added to Company will seek shareholder approval supermarket adjacent to the property. the partnership under the existing part- for a name change to First Capital We also sold Kingwood Center, a nership terms and conditions. Each Realty Inc. at the Company’s next 257,000 square-foot plaza in Houston, property currently in CDG will either annual meeting of shareholders. Texas which no longer met our invest- be sold to one of the partners in I look forward to reporting to you ment criteria. CDG or to a third party. Going forward, in this upcoming year on our accom- Fiscal 2000 saw the completion of Centrefund intends to actively pursue plishments. two renovation programs and the com- relationships with a number of different mencement or continuation of three development partners. additional ones. The extensive redevel- Sincerely, opments of South Park Village in Outlook Edmonton and Cedarbrae Mall in This has been a year of transition. We [signed] Toronto are now substantially complete. have been working hard evaluating the These are two high-quality assets that Company’s shopping centre portfolio Dori J. Segal are well anchored and well positioned in and believe that it is a good one. Paying President and Chief Executive Officer their respective markets. Redevelop- the costs related to the termination of April 30, 2001

4 report to shareholders operational review

Gross Leasable Area

Canada 62% Centrefund’s shopping centre parties. We are presently exploring opportunities with a portfolio consisted of 71 proper- number of developers. ties containing 10.0 million square We believe that investing in well-anchored plazas that

United States feet(1) of gross leasable area as at provide customers with necessities such as groceries, basic 38% December 31, 2000, including those clothing and services is a prudent strategy. Such basic items properties owned by Centrefund Development Group. are bought in both robust and recessionary times. The Operations are directed in Canada from offices in Toronto Company’s shopping centre portfolio is thus less susceptible and Montreal. In the United States, our operations are to general economic swings. Strong anchor tenants further directed from Miami by Equity One, our asset manager. reduce our exposure to economic change. We focus on sign- Centrefund’s development activities are currently ing necessities-oriented anchor tenants, the lifeblood of our carried out through its 50.1% ownership interest in shopping centres, to long-term leases. Not only does this Centrefund Development Group (“CDG”). CDG is being approach lead to steady, long-term occupancy and income, it wound up in an orderly manner. The properties in the is also instrumental in drawing consumers to the shopping partnership may be bought by the partners or sold to third centre for our local and regional tenants.

(1) Includes non-owned anchor tenants totalling 758,000 square feet

operational review 5 canadian operations

Centrefund’s Canadian shopping centre Acquisitions and Dispositions Sales portfolio, excluding those properties During 2000, a year of transition, As part of our strategy of realizing on owned by Centrefund Development Centrefund did not acquire any new value when we believe the Company’s Group, consisted of 35 properties con- shopping centres. Looking forward, we capital can be better redeployed else- taining approximately 5,962,000 square will only pursue acquisitions that meet where, we sold one Canadian property feet of gross leasable area as at our investment criteria. Subsequent in 2000. Orleans Place, a 30,000 square- December 31, 2000. The Company’s to year end, we purchased a 291,000 foot strip centre in Gloucester, Ontario, Canadian shopping centres average square-foot centre in Brampton. This was sold to the company that owned the 170,000 square feet in size (1999 – centre is located in a rapidly expanding supermarket adjacent to the property. 169,000 square feet) and have an aver- part of the Greater Toronto Area and is age net book value of $103 per square anchored by Wal-Mart and Fortino’s Redevelopment, Renovation and foot (1999 – $100 per square foot). The (Loblaws), each of which has a long- Remerchandising portfolio can be summarized as follows: term lease in place. Fiscal 2000 saw the completion of the redevelopment program at South Park

(as at December 31) 2000 1999 Village in Edmonton. A new 49,000

Number of Square Footage(1) Number of Square Footage square-foot building, on the site of the Province Properties (thousands) Properties (thousands) former Canadian Tire, was completed for Linens ’n Things and Laura Shoppes Ontario 17 3,348 18 3,450 and opened in the first quarter of Western Canada 11 1,806 11 1,831 2001. A 19,000 square-foot expansion Quebec 4 556 4 558 of an existing building was com- Maritimes 3 252 3 252 pleted to accommodate Reitmans and To t al 35 5,962 36 6,091 Le Château as well as our expansion

(1) Includes non-owned anchor tenants totalling 589,000 square feet

6 operational review to the existing SportChek store. These and the entire mall, from the interior Square Footage Leased Net Rental Income (thousands) ($ millions) recent upgrades are in addition to the CRU spaces to the exterior facade, is

10 10.0 previously completed Canadian Tire being substantially upgraded. To date, 800 767

8 7.6 store, the expansion of the Zellers the Zellers expansion has been com- 600 7.3 502 5.8 467 464 department store, and a general pleted, the former Zellers has been 6 400 4 upgrade of the entire centre. The demolished and the new Safeway is 200 2 upgrades included new facades, pylon under construction. We anticipate the 0 0 signs and entranceways. We now con- project will be completed by the second 9798 99 00 97 98 99 00 Renewals sider this to be a well-anchored, well- quarter of 2002. New Leases located and visually appealing “power In addition to the ongoing redevelop- centre” type plaza that provides a solid ment program, we are renovating the return to Centrefund. facades at a number of our centres to Anchor Tenant Sales Cedarbrae Mall saw the completion ensure that they have a modern look that Anchor tenant sales are a good indica- of its extensive redevelopment program appeals to both tenants and customers. tor of overall shopping centre perform- with the construction of Burger King Though not providing an immediate ance. We are pleased to report that and Bank of Nova Scotia pads. The mall return, we consider these upgrades during 2000 our supermarket sales has now been completely redeveloped essential to the long-term viability of increased by 10.5% and our junior and is well positioned to serve the these properties. department store sales increased by needs of its surrounding community. 2.9%. Most of our anchor leases have Cedarbrae has a strong anchor base, Leasing provisions for percentage rent to be which includes Canadian Tire, Loblaws, In Canada, we completed new lease paid when sales exceed certain Toys"R"Us and Zellers as well as a good agreements for more than 274,000 plateaus. For the year ended December mix of CRU and pad tenants. square feet of space, up from 168,000 31, 2000 the Company earned $956 thou- Phase 1 of the renovation and recon- square feet leased in 1999. These new sand (1999 – $780 thousand) in percent- figuration of the CRU area of Stanley leases will generate annual net rental age rent from its anchor tenants in Park Mall in Kitchener was substantial- income of approximately $4.4 million as Canada. The following table outlines the ly completed in 2000. The renovation compared to the $3.0 million in annual average comparable anchor tenant sales included moving the LCBO to a new net rental income generated by 1999 per square foot by major use category 10,000 square-foot pad on the site. This leasing activities. In addition, lease for the Company’s Canadian portfolio: enabled the construction of a new (per square foot) 2000 1999 entrance to the mall and allowed for the reconfiguration of the CRU and Junior department stores $ 211 $ 205 parking facilities into a much more Food supermarkets $ 578 $ 523 useful and economically viable setup. The redevelopment of Northgate Mall renewals on 190,000 square feet were Our review of the Canadian portfolio in Edmonton began in earnest in 2000. completed in 2000, as compared to has indicated there are opportunities The entire mall is being redeveloped 299,000 square feet in 1999. The 2000 available to increase the long-term value from a predominantly fashion retail cen- renewals will generate annual net of the portfolio. We are excited about the tre to a mall with more of a service retail rental income of almost $2.9 million, opportunities to improve and secure the focus. Highlights of the renovation representing an increase of 0.6% over long-term future of the properties and include the 23,500 square-foot expansion the pre-renewal net annual rent, as we look forward to implementing our of the new Zellers (the former K-Mart), compared to $4.6 million in income plans for the benefit of our shopping the demolition of the former Zellers to attributable to 1999 renewals, which centre customers and shareholders. allow the construction of a new 55,000 represented a 4.5% increase over pre- square-foot Safeway, and the demolition renewal rental rates. The occupancy of the existing Safeway which will make level of the Canadian portfolio, exclud- way for a new Future Shop and other ing projects currently under redevelop- large store format tenants. The second ment, remained at 97% of total gross storey is being converted to office use leasable area as at December 31, 2000.

operational review 7 united states operations

Centrefund’s U.S. shopping centre port- Acquisitions and Dispositions Redevelopment, Renovation and folio, excluding those properties owned During 2000, there were no U.S. acquisi- Remerchandising by Centrefund Development Group, tions. The Publix at Oakbrook Square, located consisted of 28 properties containing Kingwood Center, a 257,000 square- in North Palm Beach, has been renovat- approximately 3,452,000 square feet of foot plaza in Houston, Texas, had chron- ed and expanded by 10,000 square feet. gross leasable area as at December 31, ic vacancy problems. In fiscal 2000, we This expansion is consistent with our 2000. The Company’s American shop- took advantage of an opportunity to sell policy of working with our anchor ping centres average 123,000 square feet the plaza to a purchaser that intended to tenants to find ways to best suit their in size (1999 – 128,000 square feet) and redevelop a portion of the site for an needs in order to preserve the long-term have an average net book value of alternative use. viability of our properties. US$76 per square foot (1999 – US$74 per square foot). The portfolio can be sum- Leasing marized as follows: Leasing activity in the United States in 2000 continued with the completion of

(as at December 31) 2000 1999 new lease agreements covering approxi-

Number of Square Footage(1) Number of Square Footage mately 191,000 square feet, down from State Properties (thousands) Properties (thousands) the 313,000 square feet leased in 1999. These new leases will generate annual Florida 12 1,284 12 1,284 net rental income of US$2.5 million as Tex a s 16 2,168 17 2,425 compared to the US$2.7 million coming To t al 28 3,452 29 3,709 from 1999 leasing activities. In addition,

(1) Includes non-owned anchor tenants totalling 169,000 square feet

8 operational review lease renewals covering 208,000 square The following chart summarizes aver- feet in 2000 have been completed, up age comparable anchor tenant sales per from 150,000 square feet in 1999. The 2000 square foot for major tenants by major renewals will generate annual net rental use category for the Company’s U.S. income of US$2.9 million, a 12.1% portfolio: increase over the pre-renewal annual net (per square foot) 2000 1999 rent, as compared to a 13.7% increase on US$2.1 million of renewals completed in Food supermarkets US$ 478 US$ 461 1999. Occupancy levels, excluding proj- Drug stores US$ 600 US$ 591 ects under redevelopment, remained constant at 92% of total gross leasable For the year ended December 31, 2000 area as at December 31, 2000. the Company earned US$975 thousand (1999 – US$923 thousand) in percentage Square Footage Leased Net Rental Income (thousands) ($ millions) rent from its anchor tenants in the 463

399 United States. 400 8

300 6 5.4 263 257

4.8 Overall, Centrefund’s portfolio of prop- 200 4 3.2

2.7 erties is well positioned and given the 100 2 right level of management attention, will

0 0 9798 99 00 97 98 99 00 perform well. As is typical with a new Renewals management team, we have undertaken New Leases an extensive review of the property portfolio. Our conclusion is that the U.S. AnchorTenant Sales assets would benefit from strong local In the United States, many of our management. We believe that a busi- anchor tenants are well established in ness combination such as the one under their marketplaces and have strong discussion with Equity One would pro- sales. During 2000, our supermarket vide experienced and motivated man- sales increased by 3.7%, and our drug agement and increase the value of our store sales increased by 1.5%. U.S. investment. Consequently, Centrefund benefited from increased percentage rent.

operational review 9 shopping centre portfolio

canadian properties

Gross Anchor- Net Leasable Area Owned Leasable Area Name and Location (square feet) (square feet) (square feet) Major or Anchor Tenants ONTARIO Cedarbrae Mall, Toronto, Ontario 475,000 – 475,000 Zellers, Loblaws, Canadian Tire, Toys"R"Us, LCBO Fairview Mall, St. Catharines, Ontario 434,000 78,000 356,000 Zellers, Zehrs, Cineplex, A&P, Chapters, Future Shop, Mark’s Work Wearhouse Brantford Mall, Brantford, Ontario 299,000 – 299,000 Wal-Mart, Zehrs, Cineplex Tillsonburg Town Centre, Tillsonburg, Ontario 244,000 – 244,000 Zellers, Valu-Mart (Loblaws), Canadian Tire Zellers Festival Marketplace, Stratford, Ontario 225,000 99,000 126,000 Zellers, Sears, Canadian Tire Harwood Place Mall, Ajax, Ontario 217,000 – 217,000 Food Basics (A&P), Shoppers Drug Mart Zellers Plaza, Waterloo, Ontario 212,000 – 212,000 Zellers, Sobeys Stanley Park Mall, Kitchener, Ontario 180,000 – 180,000 Zellers, Zehrs, LCBO Parkway Centre, Peterborough, Ontario 177,000 – 177,000 Zellers, IGA (Sobeys) Stoney Creek Plaza, Hamilton, Ontario 172,000 – 172,000 Zellers, Office Place, Mark’s Work Wearhouse Zellers Plaza at Sheridan Mall, Toronto, Ontario 168,000 – 168,000 Zellers, Food Basics (A&P) Ambassador Plaza, Windsor, Ontario 137,000 – 137,000 Zellers, LCBO Thickson Place, Whitby, Ontario 134,000 44,000 90,000 A&P, Toys"R"Us Orleans Gardens, Ottawa, Ontario (1) 111,000 – 111,000 Your Independent Grocer (Loblaws) Eagleson Place, Ottawa, Ontario 75,000 – 75,000 Loblaws Northfield Centre, Waterloo, Ontario (1) 52,000 – 52,000 Sobeys, Pharma Plus Office Place, St. Catharines, Ontario 36,000 – 36,000 Office Place, Kelsey’s 3,348,000 221,000 3,127,000 WESTERN CANADA Northgate Mall, Edmonton, Alberta 542,000 – 542,000 Zellers, Safeway, Future Shop South Park Village, Edmonton, Alberta 426,000 48,000 378,000 Zellers, Canadian Tire, Toys"R"Us, Office Depot, Linens ’n Things, SportChek Sherwood Towne Square, Sherwood Park, Alberta 135,000 – 135,000 Zellers, Staples Leduc Towne Square, Edmonton, Alberta 127,000 81,000 46,000 Safeway, Canadian Tire Village Market, Sherwood Park, Alberta 119,000 – 119,000 Safeway, London Drugs Red Deer Village, Red Deer, Alberta 109,000 – 109,000 Mark’s Work Wearhouse, Sportmart Gateway Village, St. Albert, Alberta 105,000 – 105,000 Safeway Sherwood Centre, Sherwood Park, Alberta 80,000 – 80,000 CIBC, Rogers Video London Place West, Calgary, Alberta 71,000 – 71,000 London Drugs Regent Park Shopping Centre, Regina, Saskatchewan 66,000 – 66,000 Safeway Registan Shopping Centre, Regina, Saskatchewan 26,000 – 26,000 Safeway 1,806,000 129,000 1,677,000 QUEBEC La Porte de Gatineau, Gatineau, Quebec 194,000 43,000 151,000 Loblaws, Toys"R"Us, Future Shop Zellers Plaza, Chateauguay, Quebec 132,000 – 132,000 Zellers Les Galeries de Repentigny, Repentigny, Quebec 119,000 – 119,000 Metro Richelieu, Pharmaprix Les Promenades du Parc, St. Hubert, Quebec (2) 111,000 55,000 56,000 IGA, Canadian Tire 556,000 98,000 458,000 MARITIMES Cole Harbour Shopping Centre, Dartmouth, Nova Scotia 149,000 106,000 43,000 Sobeys, Canadian Tire Ropewalk Lane, St. John’s, Newfoundland 90,000 35,000 55,000 Dominion (Loblaws) Highfield Park, Dartmouth, Nova Scotia 13,000 – 13,000 Tim Hortons, Ultramart 252,000 141,000 111,000

TOTAL CANADA 5,962,000 589,000 5,373,000

(1) 50% interest owned by Centrefund (2) 71.08% interest owned by Centrefund (3) 50.1% interest owned by Centrefund (4) 25% interest owned by Centrefund

10 u.s. properties

Gross Anchor- Net Leasable Area Owned Leasable Area Name and Location (square feet) (square feet) (square feet) Major or Anchor Tenants FLORIDA Oakbrook Square, Palm Beach Gardens, Florida 216,000 – 216,000 Jacobson’s, Publix, Eckerd Bluffs Square Shoppes, Jupiter, Florida 129,000 – 129,000 Publix, Walgreens Prosperity Center, Palm Beach Gardens, Florida 122,000 – 122,000 Office Depot, T.J. Maxx, Barnes & Noble, Bed Bath & Beyond Harbour Financial Center, Palm Beach Gardens, Florida 121,000 – 121,000 Fidelity, Comerica, Prudential Marco Town Center, Marco Island, Florida 109,000 – 109,000 Publix Sawgrass Promenade, Deerfield Beach, Florida 107,000 – 107,000 Publix, Walgreens, Blockbuster Boynton Plaza, Boynton Beach, Florida 98,000 – 98,000 Publix, Eckerd Boca Village Square, Boca Raton, Florida 93,000 – 93,000 Publix, Eckerd Kirkman Shoppes, Orlando, Florida 89,000 – 89,000 Eckerd Ross Plaza, Tampa, Florida 86,000 – 86,000 Ross Dress for Less, Walgreens The Shoppes of Jonathan’s Landing, Jupiter, Florida 81,000 54,000 27,000 Albertsons The Shoppes at Westburry, Miami, Florida 33,000 – 33,000 Pizza Hut 1,284,000 54,000 1,230,000 TEXAS Plymouth Park North, Dallas, Texas 441,000 – 441,000 Fazio’s, U.S. Post Office Benbrook Square, Fort Worth, Texas 247,000 – 247,000 Under redevelopment Townsend Square, Desoto, Texas 199,000 50,000 149,000 Albertsons, Beall’s Plymouth Park West, Dallas, Texas 182,000 – 182,000 Under redevelopment Copperfield Crossing, Houston, Texas 159,000 – 159,000 Gerland’s Food Fair Mission Bend Center, Houston, Texas 129,000 – 129,000 Randalls Food Market (Safeway) Grogan’s Mill Center, Houston, Texas 118,000 – 118,000 Randalls Food Market (Safeway) Steeplechase Center, Houston, Texas 104,000 – 104,000 Randalls Food Market (Safeway) Village By The Parks, Dallas, Texas 99,000 54,000 45,000 Toys"R"Us, Pier 1 Imports Woodforest Center, Houston, Texas 94,000 – 94,000 Randalls Food Market (Safeway) Beechcrest Center, Houston, Texas 91,000 – 91,000 Randalls Food Market (Safeway), Walgreens Sterling Plaza, Dallas, Texas 65,000 – 65,000 Bank One, Wherehouse Music Wurzbach Center, San Antonio, Texas 63,000 – 63,000 Albertsons Eckerd Plaza, Dallas, Texas 62,000 11,000 51,000 Eckerd Minyards Center, Garland, Texas 59,000 – 59,000 Minyards Kroger Plaza, Dallas, Texas 56,000 – 56,000 Kroger 2,168,000 115,000 2,053,000

TOTAL UNITED STATES 3,452,000 169,000 3,283,000

shopping centre development – Completed Projects

Gross Net Leasable Area Anchor- Leasable Area Name and Location Developed Owned Developed Major or Anchor Tenants CANADIAN PROPERTIES West Lethbridge Towne Square, Lethbridge, Alberta (3) 78,000 – 78,000 Safeway, Home Hardware Steeple Hill Shopping Centre, Pickering, Ontario (3) 66,000 – 66,000 Price Chopper (Sobeys) Chemong & Towerhill, Peterborough, Ontario (3) 49,000 – 49,000 IGA (Sobeys) Commissioners Road Plaza, London, Ontario (3) 36,000 – 36,000 Price Chopper (Sobeys) Longueuil Centre, Longueuil, Quebec (3) 35,000 – 35,000 Bank of Nova Scotia, Blockbuster 264,000 – 264,000 U.S. PROPERTIES Oaks Square, Gainesville, Florida (4) 119,000 – 119,000 Bed Bath & Beyond, Borders Books City Centre, Palm Beach Gardens, Florida (4) 94,000 – 94,000 Wilmington Trust Cashmere Corners, Port St. Lucie, Florida (1) 89,000 – 89,000 Albertsons 302,000 – 302,000

TOTAL COMPLETED PROJECTS 566,000 – 566,000

T OTA L P O RT F O L I O 9,980,000 758,000 9,222,000

11 management’s discussion and analysis

BUSINESS OVERVIEW purchased a controlling interest in the In 1997, the Company entered into an Centrefund Realty Corporation was Company pursuant to the terms of a exclusive partnership arrangement for incorporated under the laws of the takeover bid. Prior to the acquisition the development of neighbourhood and Province of Ontario by articles of incor- of control, the Advisor and Property community shopping centres in Canada poration dated November 10, 1993. The Manager had a number of incentives in and the United States. The partnership Company, directly and through sub- place pursuant to advisory and certain conducts business under the name sidiaries, invests exclusively in commu- other agreements. With the acquisition Centrefund Development Group nity and neighbourhood shopping cen- of control, in accordance with the terms (“CDG”). CDG has eight developed tres in Canada and the United States. of the amended Advisory Agreement, all properties and 10 shopping centres Centrefund currently owns a portfolio of the incentive fees became payable in under development. With the change of of 72 properties with the objective of cash and the Advisory Agreement was control of Centrefund, in accordance maximizing long-term operating cash terminated. In conjunction with the with the terms of the original partner- flow and generating long-term capital change of control of the Company, a new ship agreement, Centrefund’s joint ven- appreciation. management team has been put in ture partner in CDG had the right to From its formation to the end of 1999, place to lead the Company. acquire CDG’s 33 optioned sites at cost. the affairs of the Company were man- Historically, the Company has experi- On August 18, 2000, the 33 sites were aged by a team comprised of an Advisor enced significant growth through the purchased and the partnership became and a Property Manager, subject to the acquisition of additional shopping cen- non-exclusive. Subsequent to year end, overall supervision of the Board of tres. Since the commencement of oper- the partnership began a wind-up on an Directors. On January 18, 2000, share- ations on March 29, 1994, the Company orderly basis. The properties in the part- holders of the Company approved a has expanded, through acquisition, its nership may be bought by the partners transaction to terminate the advisory initial portfolio of five shopping centres or sold to third parties. fee component and revise the incentive containing approximately 933,000 square fee component of the Advisory feet of gross leasable area to 71 proper- BUSINESS STRATEGY Agreement effective January 1, 2000. As ties containing approximately 10.0 mil- Centrefund is currently an owner and part of the transaction, employees of the lion square feet as at December 31, 2000. operator of geographically diversified Advisor were retained directly by the This growth was financed by mortgage neighbourhood and community-sized Company. Peter Cohen, the Company’s debt, three issues of common stock, five shopping centres. The centres generally Chairman, President and Chief issues of convertible debentures and the contain anchor tenants that are less Executive Officer at the time, continued issue of both common stock and con- susceptible to general economic to provide his services through the vertible debentures or equivalents on swings, such as grocery stores. revised Advisory Agreement. the acquisition of the Company’s wholly Management intends to concentrate On August 18, 2000, the Gazit Group owned U.S. subsidiary in 1994. future acquisitions mainly on centres

12 management’s discussion and analysis that are food-anchored, in areas with accepted and more meaningful indica- ices described in Note 14(d) to the con- high growth and in which the Company tor of financial performance than net solidated financial statements, result- is already active. Management believes earnings. Funds from operations does ing from the internalization of the that there are significant synergies not recognize amortization as operat- Company’s prior management, should available from concentrating on mar- ing expenses or recognize future be considered separately, as non-recur- kets in which the Company has a sig- income taxes until these are actually ring charges, when evaluating the nificant presence. The Company has paid. Management believes that Company’s financial performance. previously announced discussions with deductions for these charges are not These financial results were generat- Equity One, Inc., a publicly traded REIT meaningful in evaluating income-pro- ed from gross rental income of $147.9 controlled by the Company’s controlling ducing real estate. million in 2000, an 8.1% increase over the shareholder, regarding a business com- Funds from operations for the year $136.8 million in gross rental income bination between Centrefund Realty ended December 31, 2000, before provi- reported in 1999. This was more than (U.S.) Corporation, a wholly owned sion for previous management’s incen- offset by increased interest costs as a subsidiary of Centrefund, and Equity tive and other fees, was $43.3 million or result of borrowings incurred to fund One. The Company believes that $2.85 per common share, compared to development, property acquisitions in Centrefund’s United States portfolio $44.9 million or $3.10 per common share 1999 and payments made in 1999 and in requires an experienced local manage- before a provision for the termination of 2000 for the termination of advisory ment team in order to grow and create advisory services for the same period in services and previous management’s value. Equity One would be able to pro- 1999. On a fully diluted basis, funds incentive and other fees. vide the appropriate focus and fulfill from operations, before the aforemen- these objectives. Any combined opera- tioned provisions, was $1.48 per share Gross Rental Income tion would result in a greater realization for fiscal 2000, as compared to $1.57 per A substantial portion of the Company’s of value from these properties. share for 1999. growth can be attributed to the acquisi- Centrefund will continue to seek out In fiscal 2000, net earnings and funds tion of additional shopping centres. appropriate acquisition opportunities from operations were reduced by previ- Until fiscal 2000, the Company had and to develop and redevelop proper- ous management’s incentive and other expanded its portfolio in each year of its ties where financially advantageous, fees totalling $50.1 million. In 1999, net existence. As the growth in the size of either alone or, as in the case of devel- earnings and funds from operations the Company’s shopping centre portfolio opment and redevelopment, with joint were reduced by a provision for the occurs throughout the year, the full venture partners. termination of advisory services in the impact of these acquisitions and devel- amount of $26.9 million. Accordingly, opments is fully reflected only in the RESULTS OF OPERATIONS funds from operations in 2000, after pre- years after the properties are acquired Since mid-1996, the Company has raised vious management’s incentive and other or completed. The year ended December $360 million through the issue of four fees, represented an outflow of $6.9 mil- 31, 2000 was one of transition in which no series of convertible debentures. As lion, or $(0.45) per share, basic and fully properties were acquired. a result, as detailed on page 16 under diluted. This compares to funds from The Company’s business involves the “Earnings and Funds from Operations operations in 1999, after the provision for redevelopment and remerchandising of per Share”, there are a substantial num- termination of advisory services, of $18.1 retail space. As a result, the Company, ber of common shares attached to the million or $1.25 per share basic and $0.77 in the normal course of operations, gen- conversion rights of the Company’s fully diluted. Net loss for fiscal 2000 was erates income from payments received outstanding convertible debentures. $15.2 million, or a loss per share of $1.93, from tenants as compensation for the Accordingly, it is important when compared to net earnings of $11.2 mil- cancellation of leases. In 2000, the assessing the financial performance of lion or a loss per share of $0.17 for the Company received net lease cancella- the Company to review the fully diluted year ended December 31, 1999. tion payments of $3.9 million as com- per share data. The Company believes that the provi- pared to $2.7 million in 1999. In both The Company believes that, for sion for previous management’s incen- years, these payments were received public real estate companies, funds tive and other fees, described in Note from several different tenants and were from operations is a commonly 16, and the termination of advisory serv- included in gross rental income.

management’s discussion and analysis 13 (in thousands of dollars) 2000 1999 1998 1997 1996

1994 acquisitions $ 38,578 $ 38,728 $ 36,592 $ 32,249 $ 30,861 1995 acquisitions 11,642 13,495 11,230 9,401 7,496 1996 acquisitions 32,375 27,269 25,568 22,753 9,120 1997 acquisitions 30,319 28,920 27,804 7,395 1998 acquisitions and developments 26,081 25,904 11,405 1999 acquisitions and developments 8,126 2,511 2000 acquisitions and developments 772 Annual gross rental income $ 147,893 $ 136,827 $ 112,599 $ 71,798 $ 47,477

Number of shopping centres: Acquired during year – 8141810 Developed during year 3 41––

The chart above summarizes the Amortization mortgages and other receivables includ- sources of the Company’s growth and Amortization for the year ended ing a note due from a municipality. The the impact on gross rental income over December 31, 2000, at $12.3 million, decrease in interest and other income in the past five years. The shopping was $2 million higher than the prior 2000 over the level earned in 1999 results centres developed represent those year. This primarily results from rede- from the return to a more normalized 8% properties developed by Centrefund velopment of shopping centres in 2000 level of income from the portfolio of Development Group. and 1999, new acquisitions in 1999, use short-term mortgages and other receiv- of the sinking fund method of deprecia- ables. In 1999, this portfolio generated Interest Expense on Mortgages tion in which amortization expense on an above-average return due to the real- The increase of $10.8 million in interest buildings increases by 5% per year, and ization of cash from receivables previ- on mortgages incurred in 2000 over 1999 higher amortization of tenant induce- ously provided for. is substantially a result of the increase ments and financing fees consistent The gains on sale in the year ended in the level of borrowing by the with increases in the Company’s leas- December 31, 2000 arose from the sale of Company. In addition to the $95.4 million ing and financing activities. two shopping centres that no longer met net increase in borrowing during 2000, the investment criteria of the Company the Company incurred a full year’s Interest and Other Income as well as gains generated from the sale interest on the mortgages financed in Interest and other income comprises of excess land held for redevelopment. 1999. The average interest rate on the the following: Company’s mortgage borrowings, as (in thousands of dollars) 2000 1999 detailed on pages 16 and 17 under “Mortgages Payable”, increased from Interest and other income $ 5,306 $ 6,238 7.44% in 1999 to 7.91% in 2000. Gains on sale 1,326 1,906 Approximately 67% of new borrowings Dividend income 804 750 were in U.S. dollars and bear interest To t al $ 7,436 $ 8,894 at mortgage rates higher than the Company’s average interest rate. U.S. The Company earns interest income Dividend income represents semi- borrowings serve to reduce the from funds invested in three types of annual dividends earned by the Company’s net asset exposure to investments: short-term bankers’ Company on its investment in the com- exchange rate fluctuations. acceptances, advances made to the mon shares of Revenue Properties Company’s development partner, and an Company Limited, a Toronto Stock investment in a portfolio of short-term Exchange-listed company involved in

14 management’s discussion and analysis the ownership of shopping centres in under the terms of the agreement. Previous Management’s Incentive Canada and the United States. Capital taxes, net of recoveries from and Other Fees Subsequent to the year end, the tenants, increased by $0.1 million from On August 18, 2000, the Gazit Group Company sold 69.5% of this investment the level incurred in 1999 as a result of purchased a controlling interest in the for cash proceeds of $12.1 million. an increase in the size of the Company’s Company, pursuant to the terms of a capital base deployed in the provinces takeover bid (the “Offer”). Prior to this Corporate Expenses of Ontario and Quebec. change in control, the former Advisor Corporate expenses comprise the General and administrative costs and Property Manager had a number of following: incurred in 2000 exceeded the level incentives in place pursuant to advisory and certain other agreements. (in thousands of dollars) 2000 1999 On the acquisition of control, in accor- dance with the terms of the amended Advisory and base incentive fees paid to former Advisor $ 1,181 $ 5,333 Advisory Agreement, all of the incentive Salaries, wages and benefits 1,050 – fees became payable in cash and the U.S. asset management fees 518 – Advisory Agreement was terminated. On Capital taxes, net of recoveries from tenants 949 842 termination of the Advisory Agreement, Other general and administrative costs 1,591 1,338 in accordance with its terms, the Advisor To t al $ 5,289 $ 7,513 became entitled to receive a fair value incentive amount equal to 20% of the Advisory fees amounting to $5.3 million incurred in 1999 by $0.3 million as a excess of the fair market value of the expensed in 1999 were replaced in 2000 result of rent and other office-related Company’s shopping centre portfolio and upon the internalization of management costs incurred by the Company after the other related assets over the aggregate by a $1.2 million base incentive fee, internalization of management at the of: (i) the recorded cost of such portfolio together with $1.1 million in salaries and beginning of 2000. and assets, determined at the termina- wages of internalized employees. The tion date, and (ii) the aggregate amount base incentive fee terminated after the Interest on Debentures required to have provided the Company change of control. Interest on the Company’s outstanding since March 29, 1994 with a 10% com- In fiscal 2000, $0.3 million of fees debentures comprises the following: pound, cumulative annual return on the incurred were capitalized to shopping (in thousands of dollars) 2000 1999 centres under redevelopment and land held for development as compared to Interest on convertible debentures $ 5,821 $ 6,614 $0.9 million in 1999. No salaries, wages, Interest on debentures 2,862 3,430 or fees were capitalized after the acqui- To t al $ 8,683 $ 10,044 sition of control. Under the terms of an asset manage- Interest on convertible debentures average aggregate equity allocable to ment agreement effective August 15, declined in 2000 compared to the level such portfolio and assets, net of annual 2000, Equity One Realty & Management incurred in 1999 as a result of the reduc- incentive fees paid to the Advisor and Inc., a wholly owned subsidiary of Equity tion in the average liability component of after taking into consideration aggregate One, Inc., was retained by the Company the Company’s outstanding convertible net property cash flow and aggregate net as an asset manager of the Company’s debentures and the conversion of $6.5 sale proceeds received with respect to United States portfolio until November million of debentures into common such portfolio and assets. 30, 2000 and thereafter for the Texas shares of the Company. Former management of the Company, portfolio. The annualized asset manage- Interest incurred on debentures was which included the Company’s former ment fee is 0.4% of the book value of $0.6 million less in 2000 than the level Chairman, President and Chief Executive assets managed and the agreement is incurred in 1999 due to the maturity in Officer, who also controlled the Advisor, cancellable on 30 days’ notice. Equity 1999 of $10.1 million of U.S.-dollar- calculated and accrued the fair value One earned $0.5 million in fiscal 2000 denominated debentures. incentive amount to be $21.35 million.

management’s discussion and analysis 15 This amount was recorded after an offer Revenue Service on interest paid by the outstanding (1999 – 14,469,728 common by the Gazit Group to acquire a control- Company’s U.S. subsidiary to one of the shares). Fully diluted per share calcula- ling interest in the Company in June Company’s Canadian subsidiaries. tions reflect the conversion by the 2000. At December 31, 2000, $9.2 million These taxes can be fully credited holders of the Company’s outstanding of the fair value incentive amount had against taxes otherwise due on this convertible debentures and the exercise been advanced. The unpaid amount, if income in Canada. No minimum taxes of the outstanding common share pur- any, is secured by a fixed and floating were paid in the current year as a result chase warrants and options, and amount charge over two of the Company’s shop- of the net loss reported in the year. to a weighted average of 34,345,965 ping centres. The fair value incentive In accordance with Canadian gener- common shares outstanding (1999 – amount, as calculated by the Advisor, ally accepted accounting principles, the 33,541,412 common shares outstanding). was based on the Advisor’s estimate of Company uses the liability method for In accordance with the recommenda- the fair market value of the Company’s accounting for future income taxes. tions of the Canadian Institute of shopping centre portfolio. Under this method, future tax assets Chartered Accountants relating to the Current management of the Company and liabilities are recognized for future presentation and disclosure of convert- is disputing the calculation of the fair tax consequences attributable to differ- ible debentures in calculating earnings value incentive amount, including ences between the financial statement per share, earnings have been reduced amounts that have been advanced. carrying values and the tax bases of by $14.2 million (1999 – $13.7 million), When the dispute is resolved, the fair assets and liabilities. representing interest and accretion on value incentive amount could be In fiscal 2000, future income tax the equity component of the convertible significantly different from the amount recoveries amounted to $2.7 million, debentures. recorded. compared to $2.2 million in 1999. The The previous management’s incen- recoveries in both the current and previ- CAPITAL STRUCTURE tive fees and certain other costs primar- ous year are due primarily to the tax The real estate business is capital- ily associated with the Company’s effect of the losses arising from the pay- intensive by nature. Centrefund focuses consideration of the Offer, and the cost ments to previous management. The on its capital structure to maintain sta- of cancelling the property management recovery in 2000 was adversely affected bility and finance growth. In the real contract as it pertained to the Florida by various federal and provincial income estate industry, financial leverage tends property portfolio, in accordance with a tax rate reductions during the year, and to generate competitive rates of return settlement agreement dated August 15, an impairment of certain tax losses on equity. Centrefund’s blend of debt, 2000, totalled $50.1 million, as disclosed available for carryforward. convertible debt and equity in its capital in Note 16 to the Company’s 2000 con- base minimizes income taxes and gen- solidated financial statements. Earnings and Funds from Operations erates acceptable equity returns while per Share taking into account the long-term Income and Other Taxes Earnings and funds from operations prospects of the Company. Current taxes comprise the following: per share are calculated based on the Mortgages Payable (in thousands of dollars) 2000 1999 As at December 31, 2000, mortgages payable equalled 53.4% of the total book Canadian federal large corporations tax $ 1,350 $ 1,170 value of the Company’s assets, exclud- United States withholding taxes 495 475 ing future income tax assets, as com- Federal, state and provincial minimum taxes – 1,650 pared to 46.5% in 1999. A significant To t al $ 1,845 $ 3,295 portion of this increase was required to The increase in the Canadian federal weighted average number of outstand- fund payment for the prior year’s provi- large corporations tax results from the ing common shares during a reporting sion for termination of advisory services increase in the size of the Company’s period. Basic per share information has and the previous management’s incen- capital base. been calculated for the year ended tive and other fees that were paid in the The United States withholding taxes December 31, 2000 based on a weighted current year. represent taxes paid to the Internal average of 15,200,291 common shares At December 31, 2000, 84% of the

16 management’s discussion and analysis outstanding mortgage liabilities bore rate of 7.3% in 1999. Fixed rate financing right to convert them into a total of interest at fixed interest rates, compared has increased in conjunction with a pro- 17,658,174 common shares at share to 76% in 1999. Of the $97.8 million in gram to actively reduce floating rate prices that range from $15.50 to $25.25 floating rate financing, $68.6 million rep- exposure. per share on or before maturity. resented lines of credit, interim financ- The Company also attempts to man- If the holders of the debentures do not ing or projects under construction. age its long-term debt by staggering exercise their conversion rights, the In Canada, the Company had fixed maturity dates in order to mitigate Company has the option of repaying the rate mortgages outstanding as at short-term volatility in the debt markets. debentures on maturity by way of the December 31, 2000 in the aggregate At December 31, 2000, the Company had issue of common shares at 95% of the amount of $283.0 million bearing inter- mortgages totalling $62.8 million matur- then trading price of the Company’s est at an average interest rate of 7.8% as ing in 2001, of which $12.3 million were common stock. compared to $262.2 million in outstand- fixed rate mortgages at an average The two $100 million issues of 7.0% ing mortgages with an average interest interest rate of 9.1%. During 2002, the and 7.25% debentures completed in 1998 rate of 7.5% at the end of 1999. The Company has mortgages maturing in also provide the Company with the increase in the outstanding balance is the amount of $54.6 million, of which option, subject to regulatory approval, to the net result of $6.6 million in repay- $49.6 million are fixed rate mortgages pay semi-annual interest through the ments and $27.4 million in net new with an average interest rate of 8.0%. issue of common stock. financing, the largest of which was on The Company is in the midst of negoti- In accordance with the recommenda- Cedarbrae Mall, where $22.0 million of ating early renewals on some of these tions of the Canadian Institute of interim financing was replaced with mortgages and does not anticipate any Chartered Accountants relating to the $44.0 million of permanent financing difficulty in replacing these mortgages presentation and disclosure of financial upon completion of the redevelopment at current interest rates. instruments, each series of the program. Company’s convertible debentures is The Company’s U.S. shopping centre Debentures Payable presented in its debt and equity compo- portfolio is financed, in part, by U.S.-dol- At December 31, 2000, $38.2 million of nent parts and measured at its respec- lar-denominated mortgages. The debt 7.5% debentures are the only remaining tive issue date, as more thoroughly service requirements of these mort- issue of outstanding debentures that detailed in Note 1(g) to the Company’s gages are fully funded by the cash flow are not convertible into common stock 2000 consolidated financial statements. generated by the Company’s U.S. opera- of the Company. These debentures are The details of the Company’s outstand- tions. This reduces the Company’s expo- direct subordinated obligations of the ing convertible debentures are summa- sure to fluctuations in foreign currency Company that are secured by a floating rized in Note 8 to the Company’s 2000 exchange rates. charge on four of the Company’s consolidated financial statements. The increase from $204.2 million shopping centres and mature on (US$141.5 million) to $259.9 million December 1, 2003. Shareholders’ Equity (US$173.3 million) in the outstanding Shareholders’ equity amounted to balance of U.S. mortgages resulted Convertible Debentures $396.7 million as at December 31, 2000, from the net effect of $83.6 million Long-term convertible debentures have compared to $421.5 million at the end of (US$56.6 million) in repayments, the been issued by Centrefund as a tax- 1999. This decrease resulted from assumption of $130.5 million (US$88.4 effective method of financing a portion changes in each of the individual com- million) in new mortgages, and a of the equity component of its shopping ponents of shareholders’ equity. change in currency rate impact of centre portfolio expansion. Shareholders’ equity as at December $8.8 million. Accordingly, a large portion of the 31, 2000 included $299.9 million (1999 – As at December 31, 2000, the U.S. Company’s capital is in the form of $294.1 million) which represents the fixed rate mortgages totalled $217.5 mil- convertible debentures that mature equity component of convertible deben- lion (US$145.1 million) bearing interest between 2006 and 2008. The debentures tures as discussed above. at an average interest rate of 8.1%, com- require interest payable semi-annually As at December 31, 2000, the pared to $121.4 million (US$84.1 million) at rates ranging from 7% to 8.5%. Company had 15,376,986 (1999 – bearing interest at an average interest Holders of these debentures have the 15,070,323) issued and outstanding

management’s discussion and analysis 17 common shares with a stated capital of from the U.S. dollar exchange rate in Cash and cash equivalents were $154.5 million (1999 – $150.3 million). effect at December 31, 2000 increasing $33.6 million at December 31, 2000 (1999 During fiscal 2000, a total of 573,263 to US$1.00 = Cdn$1.50 from US$1.00 = – $28.5 million). Management believes common shares (1999 – 943,525 common Cdn$1.44 as at December 31, 1999. that it has sufficient resources to meet shares) were issued in connection with Shareholders’ equity as at December its operational requirements in the near the exercise of warrants and the conver- 31, 2000 includes a deficit of $70.9 million and longer term. Capital for new invest- sion of convertible debentures. The (1999 – $27.3 million), which substantial- ing activities in the near term will be issue of these shares added $6.5 million ly arises as a result of cumulative net generated by the sale of some of CDG’s (1999 – $11.3 million) to stated capital. income less dividends on common assets that were still in the development In 1999, 275,774 common shares were shares. Net income for the current year stage, and by the sale, for $12.1 million, issued pursuant to the Dividend and was reduced by $28.6 million, represent- of 69.5% of the Company’s investment in Interest Reinvestment Plan initiated in ing the after-tax impact of the provision Revenue Properties Company Limited, 1995. The issue of the shares in 1999 for previous management’s incentive an asset that was paying a cash divi- added $3.7 million to the Company’s and other fees as more fully described in dend of approximately 5%. stated capital. The Company terminat- Note 16 to the consolidated financial Refinancing of projects in the coming ed the Dividend and Interest statements. In the previous year, net year is expected to add to available cash. Reinvestment Plan in 1999 because it income was reduced by $16.0 million, The actual amount of future borrowings was no longer in the best interests of representing the after-tax impact of the will be determined based upon the level the Company to issue shares trading at provision for the termination of advisory of liquidity required, the prevailing inter- a significant discount to estimated net services relating to the internalization est rate and debt market conditions. asset value per share. In addition, in of management. The Company has his- 2000 the Company purchased and can- torically paid dividends, consistent with DIVIDENDS celled 266,600 common shares (1999 – general industry practice, based on The Company has maintained a policy 456,682 common shares) pursuant to its cash flow from operations as opposed of paying regular quarterly dividends to normal course issuer bid that gave rise to net income. common shareholders since it was to a charge of $2.3 million (1999 – $6.2 formed in 1994. Dividends are set, hav- million) to stated capital. LIQUIDITY ing regard to the Company’s capital Shareholders’ equity as at December Funds from operations before previous requirements and with due considera- 31, 2000 also includes $2.0 million repre- management’s incentive and other fees tion to the Company’s alternative senting the value of the warrants issued was $43.3 million (1999 – $44.9 million). sources of capital. as part of the consideration for amend- This amount was available to fund pay- In 2000, the Company paid dividends ments made to the Advisory Agreement ments on the equity portion of convert- of $0.93 per common share (1999 – detailed in Note 14(d) to the 2000 con- ible debentures totalling $21.2 million, $0.89 per common share). These divi- solidated financial statements. pay regular debt amortization of $10.0 dends represented 63% (1999 – 57%) of Shareholders’ equity as at December million, dividends of $14.2 million and the $1.48 (1999 – $1.57) the Company 31, 2000 and 1999 includes a cumulative, tenant inducements of $3.3 million for a reported as fully diluted funds from unrealized currency translation adjust- net use of cash of $5.4 million. This, operations per share before the provi- ment in the amount of $11.2 million together with the expansion and rede- sion for previous management’s incen- (1999 – $2.5 million). These amounts velopment of shopping centres, the tive and other fees (1999 – termination represent the difference between the acquisition and development of land, of advisory services). The Company is U.S. dollar exchange rate in effect at advances to the Company’s develop- currently paying a quarterly dividend of the date of the acquisition of the ment partner, the repurchase of the $0.24 per common share. To date, the Company’s U.S. net assets and the U.S. Company’s shares and payment of the annual dividend rate has grown at a dollar exchange rate as at December 31, previous management’s incentive and compound rate of approximately 5% 2000 and 1999, respectively. The signifi- other fees were funded by net mortgage since the Company was formed in cant addition to shareholders’ equity refinancing, interim financing and the March 1994. from this source during 2000 resulted sale of two shopping centres.

18 management’s discussion and analysis RISK MANAGEMENT and through a participation in the stable flow of revenue and mitigate risks Centrefund is exposed to numerous tenants’ sales success in the form related to changing market conditions. business risks in the normal course of of percentage rents which are The Company’s leasing philosophy is business that can affect both short- and payable in addition to minimum rents. directed at obtaining long-term tenan- long-term performance. It is the respon- Centrefund’s leases also require tenants cies with contractual rent escalations, sibility of management, under the super- to be responsible for the payment of as well as participation in sales success vision of the Board of Directors, to iden- realty taxes and the costs of operating through leases with percentage rent tify and, to the extent possible, mitigate and managing the property within which clauses. The Company has a very stable or minimize the impact of all such busi- they are located. As such, these leases shopping centre portfolio, with lease ness risks. The major categories of risk are considered to be net leases to the expirations in each of the next five years Centrefund encounters in conducting Company. ranging from 4.0% to 8.2% of the total its business and the manner in which it leased area in the Centrefund portfolio. takes actions to minimize their impact Nature of Tenancies are outlined below. Centrefund seeks to lease a large por- Geographic Diversification tion of the gross leasable area of each As the chart below illustrates, the Operating Risk of its properties on a long-term basis existing Centrefund portfolio is geo- The most significant operating risk to successful anchor tenants such as graphically diversified, although major affecting Centrefund’s performance is food supermarkets, discount depart- concentrations exist in Ontario, Alberta, the potential for reductions in revenue ment stores and promotional retailers. Florida and Texas. There is a trade-off resulting from an inability to maintain These tenants, in addition to creating Ontario Western Canada acceptable levels of occupancy and a stable source of long-term rental 35.3% 18.4% stable or increasing rental rates. income, generate customer traffic for Florida Centrefund focuses on securing retail the benefit of smaller retail and service 16.0% tenants that provide consumers with tenants. The nature and relationship of basic necessities and amenities as dis- the anchors to small shop tenants and Quebec tinct from those that cater to more dis- the balance between national and local 6.0% cretionary fashion demands. This makes retailers is a key ingredient in estab- Te x a s Maritimes 21.8% 2.5% the Company’s shopping centre portfolio lishing stable, sustainable revenue less susceptible to general economic from each of Centrefund’s properties. between operational efficiencies and swings, as even during economic down- As the pie chart below illustrates, more market influence that can be achieved turns, consumers continue to purchase than 76% of Centrefund’s total gross by geographic concentration, and vul- necessities such as groceries and basic leasable area is occupied by anchor, nerability to local market influences that clothing. This type of retail property is national and regional retail tenants. can be avoided by geographic diversifi- less vulnerable and more adaptable to cation. Centrefund will seek to add Local Anchor, national and changes in retail format. 18.1% regional tenants properties primarily in areas where it 76.7% The financial success of Centrefund’s currently owns shopping centres to take tenants, operating in well-located, prop- advantage of local market knowledge, erly maintained and successfully mer- anchor tenant relationships and syner- chandised and positioned properties, gies in both management and leasing. will minimize the impact of this risk on The Company does this while taking into Available the Company. Centrefund seeks out 5.2% account local market conditions that tenants which are well capitalized, and can affect occupancy rates and rental which offer the consumer goods and income levels. services at fair prices. Centrefund’s Lease Maturities lease arrangements with many of its Centrefund attempts to stagger lease tenants provide for income protection maturities on a property-by-property and growth through rent escalations basis, which helps to generate a more

management’s discussion and analysis 19 Financial Risk Acquisition Expansion and mary responsibility for any environmen- To limit the Company’s exposure to Development Risk tal remediation rests with the party overall reductions in credit availability in The key to the Company’s ongoing suc- responsible for creating the contamina- poor economic times, the Company cess will be its ability to create and tion, although the Company may also be attempts to stagger its long-term debt enhance value through the skill, creativi- liable. Centrefund maintains a program maturities and maintain an adequate ty and energy of its management team. of periodically reviewing and testing its level of cash or undrawn credit capacity. Centrefund will continue to seek out properties to determine if environmental Centrefund also attempts to arrange acquisition, expansion and selective problems exist and includes, as a stan- standalone, limited recourse project development opportunities that offer dard covenant in its leases, a prohibition financing to further mitigate the poten- acceptable risk-adjusted rates of return. against environmentally unsound activi- tial risk of a lack of replacement financ- The Company’s acquisition criteria are ties. The Company undertakes a profes- ing. In addition, the Company limits the stringent and its due diligence proce- sionally conducted environmental audit amount of floating rate debt it will incur dures are rigorous. Centrefund uses a before it completes the acquisition of at any one time in order to insulate itself team of trained professionals, including any property in order to help mitigate from interest rate volatility. lawyers, engineers, accountants and environmental risk. The Company’s U.S. operations are architects, to thoroughly analyze each self-sustaining and financed in part proposed acquisition prior to its com- ECONOMIC CONDITIONS by U.S.-dollar-denominated mortgages pletion. No acquisition is completed The economic conditions in the markets payable, which are fully serviced by the without a detailed analysis and a in which the Company operates can cash flow generated by the U.S. opera- personal inspection by the most senior have a significant impact on the tions. This reduces the Company’s expo- officers of the Company’s management Company’s financial success. Adverse sure to fluctuations in foreign currency team. Centrefund believes that acquisi- changes in general or local economic exchange rates. As the U.S. operation is tions should be undertaken only if there conditions can result in some retailers considered self-sustaining, the Company is the potential for meaningful long- being unable to sustain viable has not traditionally hedged its net U.S. term growth in operating cash flow. businesses and meet their lease dollar asset position. The book value of Distressed properties are acquired obligations to the Company, and may U.S. dollar assets, net of U.S.-dollar- only if the Company is satisfied that the also limit the Company’s ability to denominated debt, is approximately property can become economically attract new or replacement tenants. US$100 million. A 1% strengthening of viable in a short, predictable period of However, Centrefund’s shopping centres the Canadian dollar against the U.S. time. are generally less susceptible to eco- dollar would result in a US$1 million nomic downturns, as they cater to the decrease in the net book value of the Environmental Risk basic needs of the retail customer by Company’s net assets in the United Shopping centres generally involve less having food supermarkets, drug stores, States. environmental risk than other classes of financial services, discount department Centrefund limits its exposure to ris- commercial real estate, as very few ten- stores and promotional retailers as ten- ing interest rates by obtaining long-term ants manufacture, process or store sub- ants. In addition, the impact of economic fixed-rate financing, when available, and stances that would be considered envi- conditions on the overall Centrefund attempting to avoid concentrations of ronmentally unsafe. The major excep- portfolio is mitigated through the long- debt maturities. The combination of ris- tions to this general rule can be gas sta- term nature of its existing leases and ing rents and fixed-rate financing can tions situated on out-parcels adjacent through geographic diversification. significantly enhance the value of a to shopping centre properties and some well-leased shopping centre portfolio. dry-cleaning establishments. The pri-

20 management’s discussion and analysis EFFECTS OF INFLATION sions include a pass-through of operat- rent escalation clauses, which increase Inflation has remained relatively ing costs, including realty taxes and rental rates over the term of the lease at low since Centrefund commenced most management expenses, which either prenegotiated levels or levels operations in March 1994. As a result, insulates the Company from inflationary determined by reference to increases in inflation has had a minimal impact price increases. In addition, most leases the Consumer Price Index. Many of the on the Company’s operating perfor- include clauses that allow the Company Company’s non-anchor leases are for mance to date. Nevertheless, most of to receive percentage rents based on terms of five years or less, providing Centrefund’s long-term leases contain tenants’ gross sales, which generally the Company with the opportunity to provisions designed to mitigate the increase as prices rise. Most of the achieve rent increases on renewal or adverse impact of inflation. These provi- Company’s long-term leases include when rerenting the space.

Cautionary Statement Regarding Forward-looking Statements This annual report, including Management’s Discussion and Analysis contained herein, contains forward-looking statements relating to Centrefund’s operations and the environment in which it operates that are based on Centrefund’s expectations, estimates, forecasts and projections. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to control or predict. Therefore, actual outcomes and results may differ materially from those expressed in these forward-looking statements. Readers, therefore, should not place undue reliance on such forward-looking statements. Further, a forward-looking statement speaks only as of the date on which such statement is made. Centrefund undertakes no obligations to publicly update any such statements or to reflect new information or the occurrence of new events or circumstances.

management’s discussion and analysis 21 management’s responsibility

The accompanying consolidated financial statements are the responsibility of management and have been prepared in accor- dance with generally accepted accounting principles appropriate for the real estate industry in Canada. The preparation of financial statements necessarily involves the use of estimates based on management’s judgment, partic- ularly when transactions affecting the current accounting period cannot be finalized with certainty until future periods. The consolidated financial statements have been properly prepared within reasonable limits of materiality and in light of information available up to March 19, 2001. Management is also responsible for the maintenance of financial and operating systems, which include effective controls to provide reasonable assurance that the Company’s assets are safeguarded and that reliable financial information is produced. The Board of Directors is responsible for ensuring that management fulfills its responsibilities through its Audit Committee, whose members are not involved in the day-to-day activities of the Company. Each quarter the Audit Committee meets with management and, as necessary, with the independent auditors, Deloitte & Touche LLP, to satisfy itself that management’s responsibilities are properly discharged and to review and report to the Board on the consolidated financial statements. In accordance with generally accepted auditing standards, the independent auditors conduct an examination each year in order to express a professional opinion on the consolidated financial statements.

[signed] [signed]

Dori J. Segal Frank Bucys, C.A. President and Chief Executive Officer Chief Financial Officer

22 auditors’ report

To the Shareholders of Centrefund Realty Corporation:

We have audited the consolidated balance sheets of Centrefund Realty Corporation as at December 31, 2000 and 1999 and the consolidated statements of operations, deficit, funds from operations and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We have conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial s tatements present fairly, in all material respects, the financial position of the Company as at December 31, 2000 and 1999 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.

[signed]

Deloitte & Touche LLP Chartered Accountants Toronto, Ontario March 19, 2001

2 3 consolidated balance sheets

December 31 (in thousands of dollars) 2000 1999

assets Shopping centres (note 3) $ 964,481 $ 939,267 Land and shopping centres under development (note 4) 35,497 25,111 Cash and cash equivalents 33,604 28,469 Amounts receivable (note 5) 49,616 47,396 Other assets (note 6) 37,922 40,280 Future income tax assets (note 17) 16,396 4,520 $ 1,137,516 $ 1,085,043

liabilities Mortgages payable (note 7) $ 598,318 $ 502,921 Accounts payable and accrued liabilities 47,870 55,955 Convertible debentures payable (note 8) 56,485 66,463 Debentures payable (note 9) 38,166 38,166 740,839 663,505

shareholders’ equity (note 10) 396,677 421,538

$ 1,137,516 $ 1,085,043 See accompanying notes to the consolidated financial statements

Approved by the Board of Directors:

[signed] [signed]

Chaim Katzman Dori J. Segal Director Director

24 consolidated statements of operations

Years ended December 31 (in thousands of dollars, except per share amounts) 2000 1999

Gross rental income $ 147,893 $ 136,827 Property operating costs 54,985 49,571 Rental income 92,908 87,256 Interest and other income 7,436 8,894 100,344 96,150 Interest expense: Mortgages (note 12) 39,931 29,117 Debentures 8,683 10,044 48,614 39,161 Corporate expenses (note 13) 5,289 7,513 Operating income before amortization, previous management’s incentive and other fees and termination of advisory services 46,441 49,476 Amortization 12,339 10,318 Operating income before previous management’s incentive and other fees and termination of advisory services 34,102 39,158 Previous management’s incentive and other fees (note 16) 50,125 – Termination of advisory services (note 14(d)) – 26,850 Operating income (loss) (16,023) 12,308 Income and other taxes (note 17): Current 1,845 3,295 Future (2,697) (2,220) (852) 1,075 Net earnings (loss) for the year $ (15,171) $ 11,233 Net loss per common share (note 18) $ (1.93) $ (0.17) Fully diluted net loss per common share (note 18) $ (1.93) $(0.17) See accompanying notes to the consolidated financial statements

25 consolidated statements of deficit

Years ended December 31 (in thousands of dollars) 2000 1999

Deficit, beginning of the year $ (27,347) $ (11,917) Net earnings (loss) for the year (15,171) 11,233 Interest and accretion on equity component of convertible debentures (net of tax of $9,331; 1999 – $9,122) (14,221) (13,717) Dividends (14,182) (12,946) Deficit, end of the year $ (70,921) $ (27,347) See accompanying notes to the consolidated financial statements

consolidated statements of funds from operations

Years ended December 31 (in thousands of dollars, except per share amounts) 2000 1999

Operating income before previous management’s incentive and other fees and termination of advisory services $ 34,102 $ 39,158 Add: Amortization (note 2) 10,888 9,060 Loss on disposition of shopping centres 115 – Deduct: Current taxes (1,845) (3,295) Funds from operations before previous management’s incentive and other fees and termination of advisory services 43,260 44,923 Previous management’s incentive and other fees (note 16) (50,125) – Termination of advisory services (note 14(d)) – (26,850) Funds from operations $ (6,865) $ 18,073 Funds from operations per common share before previous management’s incentive and other fees and termination of advisory services (note 18) Basic $ 2.85 $ 3.10 Fully diluted $ 1.48 $ 1.57 Funds from operations per common share (note 18) Basic $ (0.45) $ 1.25 Fully diluted $ (0.45) $ 0.77 See accompanying notes to the consolidated financial statements

26 consolidated statements of cash flows

Years ended December 31 (in thousands of dollars) 2000 1999 operating activities Net earnings (loss) for the year $ (15,171) $ 11,233 Items not affecting cash: Amortization (note 2) 10,888 9,060 Loss on disposition of shopping centres 115 – Future income tax recovery (2,697) (2,220) Funds from operations (6,865) 18,073 Net change in non-cash operating items (4,270) 21,920 Cash provided by (used in) operating activities (11,135) 39,993 investing activities Acquisition of shopping centres – (27,001) Expansion and redevelopment of shopping centres (35,657) (58,789) Proceeds on disposition of shopping centres 27,092 – Acquisition and development of land (22,641) (7,568) Advances to development partner (7,873) (14,232) Investment in mortgages, net 4,458 (4,835) Investment in marketable securities – (7,567) Proceeds on disposition of marketable securities 204 – Cash used in investing activities (34,417) (119,992) financing activities Proceeds of mortgage financings 216,232 154,634 Principal repayments of mortgages payable (128,786) (53,446) Repayment of debentures – (10,088) Repayment of convertible debentures (6,950) (6,474) Issue of common shares – 13,471 Common shares purchased and cancelled (2,344) (6,226) Dividends (14,182) (12,946) Interest paid on equity component of debentures (14,250) (14,250) Cash provided by financing activities 49,720 64,675 Effect of currency rate movement on cash balances 967 (1,729) Increase (decrease) in cash and cash equivalents 5,135 (17,053) Cash and cash equivalents, beginning of the year 28,469 45,522 Cash and cash equivalents, end of the year $ 33,604 $ 28,469 supplementary information Cash income taxes paid $ 1,932 $ 2,420 Cash interest paid $ 72,481 $ 65,662 See accompanying notes to the consolidated financial statements

27 notes to consolidated financial statements

December 31, 2000 and 1999

1. Significant Accounting Policies The Company was incorporated under the laws of Ontario to engage in the business of acquiring, expanding, developing and redeveloping, and owning neighbourhood and community shopping centres. The Company’s financial statements are presented in accordance with Canadian generally accepted accounting princi- ples and are substantially in accordance with the recommendations of the Canadian Institute of Public and Private Real Estate Companies (“CIPPREC”). The Company’s significant accounting policies are as follows:

(a) Principles of Consolidation The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, and the Company’s proportionate share of assets, liabilities, revenues and expenses of partnership and limited liability corporate ventures, which are accounted for using the proportionate consolidation method.

(b) Shopping Centres, Shopping Centres Under Redevelopment and Land and Shopping Centres Under Development Shopping centres are stated at the lower of cost less accumulated amortization and net recoverable amounts. Shopping centres under development and redevelopment and land held for development are stated at the lower of cost and net recov- erable amounts. Cost includes all expenditures incurred in connection with the acquisition, development, redevelopment and initial leasing of the properties. These expenditures include acquisition costs, construction costs, initial leasing costs, other direct costs, building improvement costs and carrying costs. Carrying costs (including property taxes and interest on both specific and general debt, net of operating results) are capitalized to the cost of the properties until the accounting completion date (which is based on achieving a satisfactory occupancy level within a predetermined time limit). Net recoverable amounts represent the estimated future net cash flow expected to be received from the ongoing use and residual worth of the properties. To arrive at this amount, the Company projects the cash flow for each property on an undiscounted basis and reviews the current market value of its land holdings. These projections take into account the specific business plan for each property and management’s best estimate of the most probable set of economic conditions anticipated to prevail in the market area.

(c) Gross Rental Income Gross rental income includes rents earned from tenants under lease agreements, including percentage participation rents, property tax and operating cost recoveries, and incidental income, including lease cancellation payments.

(d) Amortization The Company follows the sinking-fund method of amortizing its buildings and improvements. Under this method, amortiza- tion is charged to income in increasing annual amounts consisting of fixed annual sums, together with interest compound- ed at the rate of 5% per annum, so as to fully amortize the properties over their estimated useful lives, which vary but do not exceed 40 years. Leasing fees and tenant inducements incurred on securing leases, other than initial leases, are amortized over the term of such leases on a straight-line basis. The Company amortizes commitment fees and other costs incurred in connection with debt financing over the term of such financing.

28 (e) Investment in Marketable Securities The Company’s investment in a public real estate company is stated at cost unless there is a decline in value which is con- sidered to be other than temporary, in which case the investment is written down to estimated realizable value.

(f) Foreign Currency The Company carries on business in the United States through operationally and financially self-sustaining wholly owned subsidiaries. Assets and liabilities denominated in United States dollars are translated into Canadian dollars at year-end exchange rates. The resulting net gains or losses are accumulated as a separate component of shareholders’ equity. Revenues and expenses denominated in United States dollars are translated at the average exchange rate for the year.

(g) Convertible Debentures The Company presents its convertible debentures in their debt and equity component parts where applicable, as follows: (i) The debt component represents the value of the semi-annual interest obligations to be satisfied by cash, discounted at the rate of interest that would have been applicable to a debt-only instrument of comparable term and risk at the date of issue. As a result, a portion of the semi-annual interest payments has been treated as a reduction of the debt compo- nent and the remainder as interest expense. (ii) The equity component of the convertible debentures is presented under “Shareholders’ Equity” in the consolidated bal- ance sheets. A value is ascribed to the equity component as a result of the issuer’s ability upon maturity to convert the debentures into common shares, and is increased over its term to the full face value of the debentures by an annual charge to retained earnings. In addition, debentures that provide the issuer with the ability to satisfy the interest payments through the issuance of common shares are also included in the equity component of convertible debentures. A value is also ascribed to the conversion right granted to the holder, which remains a fixed amount over the term of the debentures. (iii) Debenture issue costs are proportionately allocated to their respective debt and equity components. The debt compo- nent of the issue costs is classified as deferred financing costs, and is amortized over the term of the debentures. The equity component of the issue costs reduces the carrying value of the equity component of the convertible debentures.

(h) Income Taxes Income taxes are accounted for using the liability method. Under this method, future income taxes are recognized for the expected future tax consequences of differences between the carrying amount of balance sheet items and their correspond- ing tax values. Future income taxes are computed using substantively enacted corporate income tax rates for the years in which the differences are expected to reverse.

(i) Financial Instruments The fair value of the Company’s financial instruments is estimated based on the amount at which these instruments could be exchanged in a transaction between knowledgeable and willing parties. Fair value is estimated using market values where available or using present value techniques and assumptions concerning the amount and the timing of expected future cash flows and discount rates which reflect the appropriate level of risk of the instrument. The estimated fair values may differ from those which could be realized in an immediate settlement of the instruments. The fair value of cash and short-term deposits approximates their carrying value. Certain amounts receivable, other assets, accounts payable and accrued liabilities are assumed to have a fair value that approximates their historical cost carrying amount due to their short-term nature.

notes to consolidated financial statements 29 The fair value of loans receivable, mortgages payable, and debentures payable has been determined by discounting the cash flows of these financial obligations using market rates for debt of similar corresponding terms and risk. The Company may periodically enter into interest rate swap transactions to fix interest rates on current or future out- standing debt. The initial cost of entering into such transactions is recorded as interest expense over the term of the debt. Any ongoing difference payable or receivable on such transactions is recorded as an adjustment to interest expense.

(j) Use of Estimates The preparation of the Company’s financial statements in conformity with Canadian generally accepted accounting princi- ples requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the balance sheet date and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from such estimates.

(k) Stock-Based Compensation Plan The Company has a stock-based compensation plan, which is described in note 10. No compensation expense is recognized for the plan when stock options are granted. Any consideration paid on the exercise of stock options is credited to share capital.

(l) Statements of Cash Flows and Funds from Operations As is common practice within the real estate industry, the Company has included statements of funds from operations in its financial statements. This measurement, which is an important component of cash flow, is considered a meaningful and use- ful indicator of real estate operating performance. Funds from operations is the equivalent of income before extraordinary items adjusted for future income taxes, amortization of capital items and any gain or loss on sale of, or provision against, capital items. For the year ended December 31, 2000, funds from operations was impacted by the provision for previous management’s incentive and other fees (see note 16). Similarly, for the year ended December 31, 1999, funds from operations was affected by advisory termination fees (see note 14(d)). These provisions, although operating expenses, are not considered by man- agement to be a normal or recurring part of operations. The statements disclose funds from operations, both before and after these provisions. Cash and cash equivalents in the statements of cash flows consist of cash on hand, balances with banks, and invest- ments in short-term money market instruments.

2. Changes in Accounting Policies In 2000, the Company adopted two new recommendations of CIPPREC. As a result of the first recommendation, tenant inducements in the form of free rent are accounted for on a straight-line basis over initial lease terms. The effect of adopt- ing this change is a decrease in gross rental income of $0.45 million (1999 – $0.27 million) and a corresponding decrease in both amortization and funds from operations. Under the second recommendation, amortization of deferred financing costs is no longer added back to income in determining funds from operations. The effect of this change is to reduce funds from operations by $1.45 million (1999 – $1.26 million). These recommendations have been applied retroactively with restatement of 1999 amounts.

30 notes to consolidated financial statements 3. Shopping Centres Shopping centres, expressed in thousands of dollars, consist of the following:

2000 1999

Shopping Centres in Operation Land $ 165,915 $ 157,282 Buildings and improvements 791,573 754,001 Deferred leasing costs 21,814 16,697 979,302 927,980 Accumulated amortization (33,654) (24,537) 945,648 903,443

Shopping Centres under Redevelopment Acquisition costs $ 11,602 $ 27,450 Development costs 3,349 4,723 Interest costs 1,274 1,692 Other net carrying costs 2,608 1,959 18,833 35,824 Total shopping centres $ 964,481 $ 939,267

Geographic Segmentation Canada $ 571,366 $ 551,690 United States 393,115 387,577 $ 964,481 $ 939,267

During 1999, the Company acquired shopping centres at a cost of $41.6 million and assumed mortgages payable in the amount of $14.6 million in connection with these acquisitions.

4. Land and Shopping Centres under Development Land and shopping centres under development, expressed in thousands of dollars, consist of the following:

2000 1999

Acquisition costs $ 22,718 $ 14,632 Development costs 8,431 8,006 Interest costs 4,348 2,473 $ 35,497 $ 25,111

Geographic Segmentation Canada $ 13,838 $ 11,724 United States 21,659 13,387 $ 35,497 $ 25,111

notes to consolidated financial statements 31 5. Amounts Receivable Amounts receivable, expressed in thousands of dollars, consist of the following:

2000 1999

Amounts receivable $ 9,128 $ 10,323 Cash flow loans and mortgages receivable (a) 6,103 6,358 Loan receivable from a municipality (b) 1,291 1,316 Loans receivable from development partner (c) 32,437 24,564 Mortgage receivable (d) 657 4,835 $ 49,616 $ 47,396

(a) In connection with the 1997 acquisition of a portfolio of shopping centres, the Company acquired a 50% interest in various cash flow loans and mortgages receivable. The loans and mortgages receivable bear interest at varying rates generally rang- ing from 8.5% to 10% per annum and are generally due on demand. (b) The loan receivable from a municipality bears interest at the rate of 8% per annum, calculated and compounded quarterly, and is repayable quarterly over a 25-year period, maturing in December 2021. (c) Pursuant to a memorandum of agreement dated September 15, 1997, the Company has advanced amounts to fund develop- ment activities in partnerships with North American Realty Group and affiliates (see note 20). The loans bear interest at rates varying from the Company’s cost of funds to 10% and are repayable from the development partner’s share of proceeds generated from refinancings or sales. The Company has taken assignments of the development partner’s debt and equity interests in the development partnership as security for the loans receivable. (d) The mortgage receivable is non-interest bearing and matures in January 2002.

The fair values of the loans and mortgages receivable at December 31, 2000 and 1999 approximate their carrying values. The Company is exposed to credit risk to the extent that debtors fail to meet their obligations. This risk is alleviated by minimizing the amount of exposure the Company has to any one tenant, ensuring a diversified tenant mix, acquiring proper- ties in superior geographic locations, and by the hypothecated properties.

6. Other Assets Other assets, expressed in thousands of dollars, consist of the following:

2000 1999

Deferred financing and issue costs $ 7,395 $ 5,666 Deferred interest rate hedge costs 6,664 7,897 Investment in Revenue Properties Company Limited 15,809 16,045 Prepaid expenses and other assets 8,054 10,672 $ 37,922 $ 40,280

Based on its publicly listed trading price, as at December 31, 2000 the market value of the Company’s investment in the common shares of Revenue Properties Company Limited was $15.6 million (1999 – $13.6 million). Subsequent to year end, the Company sold 69.5% of the shares for cash proceeds of $12.1 million.

32 notes to consolidated financial statements 7. Mortgages Payable Mortgages payable, secured by shopping centres, presented by geographic segment and expressed in thousands of dollars, consist of the following:

2000 1999 Canada U.S. Total To t al

Fixed rate $ 282,964 $ 217,523 $ 500,487 $ 383,554 Floating rate 55,504 42,327 97,831 119,367 $ 338,468 $ 259,850 $ 598,318 $ 502,921

Canada: Fixed rate financing bears interest at an average fixed rate of 7.8% (1999 – 7.5%) and matures in years ranging from 2001 to 2019. Floating rate financing bears interest at floating rates determined by reference to Canadian prime lending and bankers’ acceptance rates and matures in 2001 and 2002.

United States: Fixed rate financing bears interest at an average fixed rate of 8.1% (1999 – 7.3%) and matures in years ranging from 2001 to 2013. Floating rate financing bears interest at a floating rate determined by reference to the U.S. prime lending rate and to the London Inter-Bank Offering Rate and matures in years ranging from 2002 to 2004.

As at December 31, principal repayments of mortgages payable, expressed in thousands of dollars, are due as follows:

2000 Canada U.S. Total

2001 $ 74,034 $ 2,101 $ 76,135 2002 42,830 14,017 56,847 2003 13,139 33,042 46,181 2004 9,584 42,703 52,287 2005 6,867 52,444 59,311 Thereafter 192,014 115,543 307,557 $ 338,468 $ 259,850 $ 598,318

The fair values of mortgages payable at December 31, 2000 approximate their carrying values (1999 – $492 million). The Company is exposed to financial risks arising from fluctuations in interest rates that could cause a variation in earn- ings. The Company periodically enters into interest rate swap transactions to fix interest rates on current or future out- standing debt. As part of its risk management program, the Company endeavours to maintain an appropriate mix of fixed rate and float- ing rate debt and strives to match the nature and timing of lease inflows to financing thereon.

notes to consolidated financial statements 33 8. Convertible Debentures As at December 31, 2000, the Company has outstanding four series of convertible debentures. All of the debentures are unsecured subordinated debentures, require interest payable semi-annually and are convertible into common stock of the Company at the holders’ option until the day prior to the redemption date. In addition, the Company has the right to settle its obligations to repay principal upon redemption or maturity by issuing common stock. If the Company chooses to issue common stock, it is to be valued at 95% of the weighted average trading price for the 20 consecutive trading days ending five days prior to the redemption or maturity date, as may be applicable. In the case of the 7.0% and the 7.25% series, the Company also has the option, subject to regulatory approval, of settling interest due from time to time by way of the issue of common shares valued in the same fashion as with respect to the repayment of principal on those debentures. The other terms of the convertible debentures are summarized as follows:

Series Conversion Price Maturity Earliest Redemption Date

8.5% convertible debentures $15.50 per common share November 30, 2006 November 30, 2002 7.875% convertible debentures $17.00 per common share January 31, 2007 January 31, 2003 7.0% convertible debentures $23.50 per common share February 28, 2008 February 28, 2004 7.25% convertible debentures $25.25 per common share June 30, 2008 June 30, 2004

The components of the convertible debentures, expressed in thousands of dollars, are classified as follows:

2000 1999 Series Principal Liability Equity Liability Equity

8.5% convertible debentures $ 57,441 $ 21,391 $ 36,694 $ 24,056 $ 33,735 7.875% convertible debentures 97,522 35,094 63,835 39,337 58,948 7.0% convertible debentures 100,000 – 99,823 – 99,163 7.25% convertible debentures 100,000 – 99,547 – 98,917 7.5% convertible debentures –––3,070 3,356 $ 354,963 $ 56,485 $ 299,899 $ 66,463 $ 294,119

All the outstanding 7.5% convertible debentures were converted during 2000 to common shares at $11.00 per common share. Based on its publicly listed trading price, as at December 31, 2000, the market value of the principal amount of the convertible debentures was $257.6 million (1999 – $292.7 million).

9. Debentures Payable The Company’s 7.5% debentures, totalling $38.166 million, mature on December 1, 2003 and bear interest at a rate of 7.5% per annum, payable semi-annually. These debentures are subordinated direct obligations of the Company, secured by a float- ing charge on real and immoveable property comprising four of the Company’s shopping centres. Based on its publicly listed trading price, as at December 31, 2000, the market value of the 7.5% debentures was $32.2 mil- lion (1999 – $33.6 million).

34 notes to consolidated financial statements 10. Shareholders’ Equity Shareholders’ equity, expressed in thousands of dollars, consists of the following:

2000 1999

Equity component of convertible debentures (note 8) $ 299,899 $ 294,119 Share capital 154,498 150,293 Advisory warrants (note 14(d)(i)) 2,000 2,000 Cumulative currency translation adjustment (note 11) 11,201 2,473 Deficit (70,921) (27,347) $ 396,677 $ 421,538

The Company has an unlimited number of authorized preference shares and common shares. The preference shares may be issued from time to time in one or more series, each series comprising the number of shares, designations, rights, privileges, restrictions and conditions which the Board of Directors determines by resolution; preference shares are non-voting and rank in priority to the common shares with respect to dividends and distributions upon dissolution. The common shares carry one vote each and participate equally in the earnings of the Company and the net assets of the Company upon disso- lution. Dividends are payable on the common shares as and when declared by the Board of Directors.

The following table sets forth the particulars of the issued and outstanding shares of the Company:

Stated Capital No. of Common Shares (thousands of dollars)

Issued and outstanding at December 31, 1998 14,307,706 $ 141,581 Issued in connection with exercise of warrants and convertible debenture conversions 943,525 11,284 Issued in connection with the Dividend and Interest Reinvestment Plan 275,774 3,654 Common shares purchased and cancelled (456,682) (6,226) Issued and outstanding at December 31, 1999 15,070,323 150,293 Issued in connection with convertible debenture conversions 573,263 6,549 Common shares purchased and cancelled (266,600) (2,344) Issued and outstanding at December 31, 2000 15,376,986 $ 154,498

During fiscal 2000, the Company purchased 266,600 shares (1999 – 456,682 shares) under its normal course issuer bid. In October 2000, the Company filed and was granted a Notice of Intention to renew its normal course issuer bid with The Toronto Stock Exchange. This program allows the Company to purchase up to 768,849 of its common shares over the next year. In connection with the acquisition of Centrefund America Holding Corp. on December 31, 1994, the Company issued 1,149,000 warrants for the acquisition of 1,149,000 common shares at an exercise price of US$8.12 per share exercisable on or before December 31, 1999. During 1999, the balance of the outstanding warrants were exercised and as a result, at December 31, 2000 and December 31, 1999 no warrants remained issued and outstanding. In October 1998, the Company received securities commission approval to issue 1,250,000 stock options to its directors, officers and the management personnel of both the Advisor and Property Manager (see note 15). As at December 31, 2000, the Company had 487,500 outstanding stock options (1999 – 837,500) at an exercise price of $14.30 which vest 20% annually and expire in October 2008. As at December 31, 2000, no stock options had yet been exercised. During 2000, 350,000 stock options were cancelled (1999 – 7,500).

notes to consolidated financial statements 35 11. Foreign Currency The Company maintains its accounts in Canadian dollars. However, a portion of its operations are located in the United States and therefore the Company is subject to foreign currency fluctuations which may, from time to time, impact its finan- cial position and results. The Company’s U.S. shopping centre portfolio is self-sustaining and financed in part by U.S.-dollar- denominated mortgages payable, which are fully serviced by the cash flow generated by the Company’s U.S. operations. This reduces the Company’s exposure to fluctuations in foreign currency exchange rates. The Company has not hedged its U.S. dollar currency risk. As a result, a strengthening of the Canadian dollar would result in a reduction in the carrying value of the Company’s net assets in the United States. The cumulative currency translation adjustment represents the cumulative unrecognized exchange adjustment on the net assets of the Company’s subsidiaries that operate in the United States. The change for the year reflects the impact of U.S. currency movements at December 31, 2000 relative to the exchange rate in effect as at December 31, 1999 on these net assets. The rate of exchange in effect on December 31, 2000 was US$1.00 = Cdn$1.50 (1999 – Cdn$1.44). The average rate of exchange during 2000 was US$1.00 = Cdn$1.48 (1999 – Cdn$1.48).

12. Interest Expense on Mortgages Interest expense incurred on mortgages, expressed in thousands of dollars, consists of the following:

2000 1999

Total interest cost $ 43,052 $ 34,910 Less interest capitalized: Shopping centres under redevelopment (1,791) (3,763) Land and shopping centres under development (1,330) (2,030) $ 39,931 $ 29,117

13. Corporate Expenses Corporate expenses, expressed in thousands of dollars, consist of the following:

2000 1999

Advisory fees (see note 14(a)) $ – $ 5,333 Annual base incentive fees (see note 14(d)(ii)) 1,181 – Capital taxes 949 842 General and administrative 3,159 1,338 $ 5,289 $ 7,513

14. Related Party Transactions – Advisor’s Fees Dawsco Realty Advisory Corp. (the “Advisor”), a private Ontario corporation controlled by two of the Company’s former directors, one of whom was the Chairman, President and Chief Executive Officer of the Company until August 18, 2000, was responsible for managing and administering all the affairs of the Company, pursuant to an Advisory Agreement made February 15, 1994 (the “Advisory Agreement”) and subsequently revised effective January 1, 2000.

36 notes to consolidated financial statements The fees paid, advanced or accrued to the Advisor, expressed in thousands of dollars, are summarized as follows:

2000 1999

Advisory fees (a) $ – $ 6,263 Acquisition and disposition fees (b) – 900 Annual incentive fees (c) 1,519 2,654 Advisory termination fees (d) – 25,000 Fair value incentive amount and other fees (note 16) 37,386 – Annual base incentive fees (d) (ii) 1,181 – $ 40,086 $ 34,817

(a) Advisory Fees Until December 31, 1999 (see note 14(d)), the Advisor was paid an annual advisory fee equal to 0.65% of the total cost of the first $150 million of the Company’s assets and 0.6% of the total cost of the Company’s assets in excess of $150 million. During 1999, $0.93 million in advisory fees were capitalized to shopping centres under redevelopment and land and shop- ping centres under development.

(b) Acquisition and Disposition Fees Until December 31, 1999 (see note 14(d)), the Advisor was also paid an acquisition fee of 1.5% of the total acquisition price upon the purchase of any property by the Company and a disposition fee of 0.5% of the aggregate sale price of any property sold by the Company.

(c) Annual Incentive Fees Until August 17, 2000 (see note 16), the Advisor was entitled to earn an annual incentive fee equal to 20% of the amount by which the aggregate net property cash flow and the aggregate net sale proceeds generated by the Company’s shopping centre portfolio, and other related assets, exceed 10% of the aggregate equity invested in such portfolio and other assets.

(d) Advisory Termination Fees In November 1999, the Board of Directors of the Company approved a transaction to terminate the advisory fee and acquisi- tion and disposition fee components and revise the incentive fee provisions of the Advisory Agreement. Pursuant to the trans- action, the amended Advisory Agreement could be terminated by the Company at the expiration of the current term on March 29, 2004, subject to obtaining shareholder approval, or upon the expiration of any subsequent term. In addition, the Advisor agreed to continue to provide the strategic services of the Company’s Chairman, President and Chief Executive Officer. The transaction, which took effect on January 1, 2000, was formally approved by the shareholders on January 18, 2000.

If the amended Advisory Agreement was terminated March 29, 2004, then: ° Effective January 1, 2000 and for the balance of the term, the annual incentive fees (see note 14(c)) would be calculated solely with reference to the shopping centre portfolio and related assets owned by the Company as at September 30, 1999; ° The Fair Value Incentive Amount (see note 16), payable upon termination of the amended Advisory Agreement, would be calculated solely with reference to the shopping centre portfolio and related assets owned by the Company as at September 30, 1999; ° The Company would have the option to satisfy the Fair Value Incentive Amount through a combination of cash and com- mon shares provided that the cash portion of such combined payment represented at least 50% thereof, the common shares forming part of such combined payment were issued on a tax-deferred basis to the Advisor and certain other conditions were met; and ° The Property Management Agreement would be terminated effective March 29, 2004 (see note 15).

notes to consolidated financial statements 37 As consideration for the amendments to the Advisory Agreement and in consideration for the Advisor continuing to provide the strategic services of the Company’s Chairman, President and Chief Executive Officer, the Advisor was to receive the following: (i) An advisory termination fee of $25 million plus interest to the payment date in the amount of $0.74 million, and in this regard, the Advisor agreed to use $2 million of the termination payment to purchase advisory warrants having a 10-year term which entitled the holder to purchase 1,000,000 common shares at an exercise price of $14 per share; (ii) An annual base incentive fee of $2 million (increased by 10% calculated and compounded annually commencing January 1, 2001 to the end of the term of the amended Advisory Agreement). An amount of $1.18 million was paid under this agreement in 2000. On the change of control (see note 16), under the terms of the amended Advisory Agreement, the total amount payable to the end of the contract term was accelerated and resulted in a further $8.84 million payment; (iii) A stock appreciation package, which effectively represented at the time of issue the right to warrants exercisable at $14.00 per share until January 1, 2010 to purchase 3.6 million shares of the Company. On the change of control (see note 16), under the terms of the amended Advisory Agreement, this package became payable in cash as fair value and annual incentive amendment fees totalling $7.2 million.

Pursuant to a fee sharing agreement, the Property Manager received a portion of all of the consideration received by the Advisor, except for the annual base incentive fee. A provision for the advisory termination transaction was recorded in the financial statements at December 31, 1999 totalling $26.85 million. The provision included $25 million for the payment in respect of the termination of the advisory fee and acquisition and disposition fee components of the Advisory Agreement. It also included a provision for third-party professional and consulting costs of $1.85 million in connection with the negotiation and preparation of the documents implementing the amendments to the Advisory Agreement described above. The Advisory Agreement was terminated on August 18, 2000 in accordance with its terms (see note 16).

15. Property Management and Asset Management Fees Centrecorp Management Services Limited (the “Property Manager”), a private Ontario corporation controlled by two of the Company’s former directors, acts as the Company’s property manager pursuant to a Property Management Agreement made February 15, 1994. The Property Management Agreement expires March 29, 2004. The Property Manager has also been retained by Centrefund Development Group to act as the Partnership’s property manager, investment advisor and consult- ant with respect to the acquisition, development and retention of property, pursuant to an agreement effective January 1, 2000. The Property Manager is responsible for all property management functions, including property administration, maintenance and leasing.

The fees earned by the Property Manager, expressed in thousands of dollars, are summarized as follows:

2000 1999

Property and asset management fees $ 5,153 $ 4,626 Construction supervision fees 990 1,385 Leasing fees 3,152 3,123 Overhead cost reimbursements 899 561 $ 10,194 $ 9,695

The Property Manager also received a portion of the acquisition and disposition fees and annual incentive fees paid to the Advisor. For the year ended December 31, 2000, the Company’s share of development overhead cost reimbursements paid to the Property Manager totalled $2.0 million (1999 – $2.3 million).

38 notes to consolidated financial statements Under the terms of an asset management agreement effective August 15, 2000, Equity One Realty & Management Inc. (“Equity One”), a wholly owned subsidiary of Equity One, Inc., a publicly traded company controlled by the Company’s con- trolling shareholder, was retained by the Company as an asset manager of the Company’s United States portfolio until November 30, 2000 and thereafter for the Texas portfolio. The agreement is cancellable on 30 days notice. Equity One earned an amount of $0.52 million in 2000 under the terms of the agreement. Under the terms of a property management agreement effective December 1, 2000, Equity One was retained as property manager of the majority of the Company’s Florida property portfolio. The agreement is cancellable on 120 days notice. Equity One earned an amount of $0.08 million in 2000 under the terms of the agreement.

16. Previous Management’s Incentive and Other Fees On August 18, 2000, the Gazit Group purchased a controlling interest in the Company, pursuant to the terms of a takeover bid (the “Offer”). Prior to this change in control, the former management had a number of incentives in place pursuant to advisory and certain other agreements as outlined in note 14. On the acquisition of control, in accordance with the terms of the amended Advisory Agreement, all of the incentive fees became payable in cash and the Advisory Agreement was terminated. On termination of the Advisory Agreement, in accor- dance with its terms, the Advisor became entitled to receive a fair value incentive amount equal to 20% of the excess of the fair market value of the Company’s shopping centre portfolio and other related assets over the aggregate of: (i) the record- ed cost of such portfolio and assets, determined at the termination date, and (ii) the aggregate amount required to have pro- vided the Company, since March 29, 1994, with a 10% compound, cumulative annual return on the average aggregate equity allocable to such portfolio and assets, net of annual incentive fees paid to the Advisor and after taking into consideration aggregate net property cash flow and aggregate net sale proceeds received with respect to such portfolio and assets. Former management of the Company, which included the Company’s former Chairman, President and Chief Executive Officer and who also controlled the Advisor, calculated and accrued the fair value incentive amount to be $21.35 million. This amount was recorded after an offer by the Gazit Group to acquire a controlling interest in the Company in June 2000. At December 31, 2000, $9.2 million of the fair value incentive amount had been advanced. The unpaid amount, if any, is secured by a fixed and floating charge over two of the Company’s shopping centres. The fair value incentive amount, as calculated by the Advisor, was based on the Advisor’s estimate of the fair market value of the Company’s shopping centre portfolio. Current management of the Company is disputing the calculation of the fair value incentive amount, including amounts that have been advanced. When the dispute is resolved, the fair value incentive amount could be significantly different from the amount recorded. The previous management’s incentive fees and certain other costs, primarily associated with the Company’s considera- tion of the Offer, and the cost of cancelling the property management contract as it pertains to the Florida property portfo- lio, in accordance with a settlement agreement dated August 15, 2000, are summarized as follows, expressed in thousands of dollars:

Fair value incentive amount, as calculated and accrued by previous management and currently under dispute $ 21,350 Acceleration of annual base incentive fee (note 14(d)(ii)) 8,836 Fair value and annual incentive amendment fees (note 14(d)(iii)) 7,200 37,386 Termination of employment contracts and other costs 4,351 Property management cancellation fees 1,850 Investment banking fees 4,439 Legal and other professional fees 2,099 $ 50,125

notes to consolidated financial statements 39 17. Income Taxes The Company’s activities are carried out directly and through operating subsidiaries and partnership ventures in Canada and the United States. The income tax effect on operations depends on the tax legislation in each country and the operat- ing results of each subsidiary and partnership venture and the parent Company.

The provision for income and other taxes, expressed in thousands of dollars, is calculated as follows:

2000 1999

Provision for (recovery of) income taxes on income at the combined Canadian federal and provincial income tax rates $ (6,909) $ 5,490 Increase (decrease) in the provision for income taxes due to the following items: Reduction in future income tax rates 2,584 – Impairment of tax losses 2,064 – Large Corporations Tax 1,350 1,170 United States operations (1,804) (6,370) United States withholding taxes 495 475 Other 1,368 310 $ (852) $ 1,075

The Company’s future income tax assets and liabilities, expressed in thousands of dollars, are as follows:

2000 1999

Future income tax assets: Losses available for carry-forward $ 19,379 $ 23,551 Other assets 14,787 12,748 Canadian and U.S. minimum tax credits 2,129 1,573 Other 256 463 36,551 38,335

Future income tax liabilities: Shopping centres 20,155 33,696 Other – 119 20,155 33,815 Future income tax assets, net $ 16,396 $ 4,520

At December 31, 2000, the Company has tax-loss carry-forwards for Canadian income tax purposes of approximately $44.3 million, which have been recognized as future income tax assets and are available to reduce future Canadian taxable income. These tax-loss carry-forwards expire at various dates between December 31, 2003 and December 31, 2007. The Company has tax-loss carry-forwards for United States income tax purposes of approximately $6.5 million (US$4.4 million), which have been recognized as future income tax assets and are available to reduce future taxable income. These tax-loss carry-forwards expire on December 31, 2020.

18. Per Share Calculations Basic per share information is calculated based on a weighted average of 15,200,291 common shares outstanding during the year (1999 – 14,469,728 common shares). The determination of basic earnings per share reflects a reduction of $14.2 million (1999 – $13.7 million) to reported net earnings, which represents interest and accretion on the equity component of convertible debentures, net of tax.

40 notes to consolidated financial statements Fully diluted per share information is calculated based on a weighted average of 34,345,965 common shares (1999 – 33,541,412 common shares), which reflects the conversion of the convertible debentures and the exercise of the outstanding warrants and issued options.

19. Segmented Information The Company and its subsidiaries operate in the retail-related real estate industry in both Canada and the United States.

Operating income before previous management’s incentive and other fees by geographic segment for the year ended December 31, 2000, expressed in thousands of dollars, is summarized as follows:

Canada U.S. Total

Gross rental income $ 87,608 $ 60,285 $ 147,893 Property operating costs 35,533 19,452 54,985 Rental income 52,075 40,833 92,908 Interest and other income 4,766 2,670 7,436 56,841 43,503 100,344 Interest expense: Mortgages 22,301 17,630 39,931 Debentures 8,683 – 8,683 30,984 17,630 48,614 Corporate expenses 3,812 1,477 5,289 Operating income before amortization and previous management’s incentive and other fees 22,045 24,396 46,441 Amortization 6,468 5,871 12,339 Operating income before previous management’s incentive and other fees $ 15,577 $ 18,525 $ 34,102

Operating income before termination of advisory services by geographic segment for the year ended December 31, 1999, expressed in thousands of dollars, is summarized as follows:

Canada U.S. Total

Gross rental income $ 78,196 $ 58,631 $ 136,827 Property operating costs 30,295 19,276 49,571 Rental income 47,901 39,355 87,256 Interest and other income 5,607 3,287 8,894 53,508 42,642 96,150 Interest expense: Mortgages 14,929 14,188 29,117 Debentures 9,476 568 10,044 24,405 14,756 39,161 Corporate expenses 4,253 3,260 7,513 Operating income before amortization and termination of advisory services 24,850 24,626 49,476 Amortization 5,573 4,745 10,318 Operating income before termination of advisory services $ 19,277 $ 19,881 $ 39,158

notes to consolidated financial statements 41 20. Partnership Ventures The Company participates in partnership ventures that own land, shopping centres, and shopping centres under develop- ment. The Company’s largest partnership venture is a 50.1% interest in a partnership with North American Realty Group and affiliates (“NARG”), to engage in the development of neighbourhood and community-sized shopping centres in Canada and the United States. NARG is an Ontario partnership controlled by North American Development Corporation, a private corporation related to the Company’s Property Manager and to two of the Company’s former directors. In accordance with the terms of the partnership agreement, as a result of the change of control, the partnership is to be wound up on an orderly basis. The partners will be entitled to purchase, on an alternating basis, the properties from the partnership at fair market value. Any properties not purchased by the partners will be sold on an orderly basis. The Company has advanced $32.4 million in loans to its development partner, NARG, to partially finance its investment in the development partnership. The loans bear interest at rates varying from the Company’s cost of funds to 10%. For the year ended December 31, 2000, the Company earned interest of $3.1 million (1999 – $1.8 million) from loans to the develop- ment partner which will be repaid from cash flows generated from the development properties and from the development partner’s share of proceeds generated from refinancings or sales. The following amounts, expressed in thousands of dollars, are included in the consolidated financial statements and represent the Company’s proportionate interest in the financial accounts of the partnership ventures:

2000 1999

Assets $ 76,691 $ 48,193 Liabilities $ 56,030 $ 34,053 Revenues $ 5,319 $ 1,872 Expenses $ 6,721 $ 1,663 Cash flow provided by (used in): Operating activities $ 1,524 $ 115 Financing activities $ 25,065 $ 25,365 Investing activities $ (26,880) $ (25,457)

The Company is contingently liable for certain of the obligations of the partnership ventures and all of the assets of the partnership ventures are available for the purpose of satisfying such obligations and guarantees (see note 21(a)).

21. Contingencies (a) The Company has provided guarantees for approximately $60.1 million (1999 – $33.7 million) to various lenders in connection with loans advanced to Centrefund Development Group. (b) The Company is also contingently liable for letters of credit in the amount of $11.9 million (1999 – $9.2 million) issued in the ordinary course of business.

22. Comparative Amounts Certain comparative amounts have been reclassified to reflect the current year’s presentation.

42 notes to consolidated financial statements corporate information

directors officers

Chaim Katzman Dori Segal Chairman President and Chief Executive Officer Centrefund Realty Corporation Sylvie Lachance Dori Segal Executive Vice-President Vice-Chairman and President Eastern Canada Centrefund Realty Corporation Frank Bucys Gary M. Samuel(1) Chief Financial Officer Former Vice-Chairman and Richard J. Steinberg Chief Executive Officer Secretary Royop Properties Corporation

Steven K. Ranson(1) President legal counsel Canadian Home Income Plan Corporation Tor y s Tor ont o, Ont ar io John Harris Real Estate Investor Goodmans LLP Tor ont o, Ont ar io Nathan Hetz(1) Chief Executive Officer Alony Hetz Properties and auditors Investments Ltd.

Moshe Ronen Deloitte & Touche LLP Partner Tor ont o, Ont ar io Ronen, Zimmerman

Richard J. Steinberg Partner Fasken Martineau DuMoulin LLP

(1) Member of Audit Committee

43 shareholder information

Head Office 161 Bay Street, Suite 2820 Toronto, Ontario M5J 2S1 Tel: 416.504.4114 Fax: 416.941.1655

Toronto Stock Exchange Listings Common shares: CFE 7.5% debentures: CFE.DB 8.5% convertible debentures: CFE.DB.A 7.875% convertible debentures: CFE.DB.B 7% convertible debentures: CFE.DB.C 7.25% convertible debentures: CFE.DB.D

Tr a ns f e r A g e n t Computershare Trust Company of Canada 100 University Avenue, 11th Floor Toronto, Ontario M5J 2Y1 Tel: 416.981.9633 (Toll Free) 1.800.663.9097 enview Graphics Printing: Gl Printing: oveable Type Inc. oveable Type Film: M Film: Lexington

44 CENTREFUND REALTY CORPORATION

Head Office BCE Place, Canada Trust Tower 161 Bay Street, Suite 2820 To r on t o, O n t a r i o M5J 2S1 Tel: 416.504.4114 Fax: 416.941.1655

Montreal Office 2620 De Salaberry Suite 201 Montreal, Québec H3M 1L3 Tel: 514.332.0031 Fax: 514.332.5135

Miami Office 1696 N.E. Miami Gardens Drive North Miami Beach, FL 33179 Tel: 305.947.1664 Fax: 305.947.1734 www.centrefund.com centrefund realty corporation bce place, canada trust tower 161 bay street, suite 2820 toronto, ontario m5j 2s1 www.centrefund.com